Wednesday, August 10, 2016 - 09:35

REALITY CHECK: China July Loans Seen Plunging After June Jump

--New loans have fallen in July from June in 14 of the last 16 years

LONDON (MNI) - Chinese banks' new loans dropped sharply in July after strong credit growth in June largely exhausted the pool of clients wanting to borrow, banking sources with knowledge of the data told Market News International.

Residential mortgages and bill financing accounted for the majority of July new bank loans, with very little lending to companies, they said.

Net new loans given out last month -- gross new loans minus repayments -- were probably less than half of June's CNY1.38 trillion and could surprise the market on the downside, the sources said. The median estimate in Market News's survey of 17 economists is for July new loans of CNY800 billion, with the forecasts ranging from Industrial Bank's CNY1.2 trillion down to CNY500 billion from Huachuang Securities and Nomura.

Sources familiar with the data said combined net new loans by the Big Four state-owned commercial banks were more than 50% lower than in June when they lent a net CNY440.3 billion, which was the second-highest figure this year.

The decline in new credit in July shouldn't come as a surprise. Since 2000, July net new loans have dropped from June in all but two years -- 2008 and 2015. The scale of the drop has ranged from 11.6% in July 2010 to 107% in July 2005 when net new lending was a negative CNY31.4 billion as more loans were repaid than taken out.

Loans are weaker because there's usually a surge in credit in June when banks dress up their balance sheets ahead of their interim results announcements and to meet certain regulatory criteria.

"There was so much lending for projects in June there wasn't much left to give out in July," said a loan officer with a bank based in southeastern China.

Even so, the decline may still cause jitters in the markets given their concerns about China's economic slowdown. In a sign of the People's Bank of China's sensitivity and its determination to maintain calm, it issued a rare statement after April growth in credit and M2 slowed sharply to explain the decline and to reassure markets that there was nothing to worry about.

One of the factors behind the April lending slump that could also be at play in the July lending figures is the repayment of loans by local governments from the proceeds of the issuance of so-called swap bonds. Under a central government programme aimed at cutting borrowing costs for the state, local governments are being allowed to sell bonds to pay down the more expensive bank debt of their financing vehicles (LGFV).

Local governments issued CNY1.028 trillion yuan of bonds in June and CNY395.5 billion in July, and could have used much of the proceeds to pay back loans, which would have depressed the headline lending number. The PBOC doesn't usually give out this data.

The decline in July lending meant banks again resorted to bill financing to make the headline loan number look better.

According to one source, more than half of the Big Four banks' new loans in July comprised bill financing -- where companies take their bankers acceptances to the banks and exchange them for short-term funds.

Bill financing is typically used by Chinese banks to adjust the size of their new lending -- they boost bill financing when other loans are weak and reduce it when other loans are strong. In April, when the lending numbers came in much weaker than expected at CNY555.6 billion, the lowest for that month since 2008, bill financing amounted to CNY238.8 billion, more than double the monthly average in the first quarter.

In contrast, in June, when net new loans topped the estimates of all 17 economists in Market News's survey, bill financing was a net negative CNY15.1 billion, indicating more bills were repaid than borrowed in the month.

"Loans to corporate clients were not strong so banks had to use bill financing to get their numbers up," Zhang Miao, a bond analyst with TF Securities, wrote in a research note. He estimated that excluding bill financing, net new loans to companies could have fallen to zero in July and that bill financing was around CNY100 billion.

Banks are becoming more reluctant to grant new loans and roll over existing loans to companies amid growing concerns about credit risks as non-performing loans rise. Shipbuilder Wuhan Guoyu Logistics defaulted on a bond payment this week and said there had been "significant changes" in cooperation with some of its banks.

And while the China Banking Regulatory Commission, on the one hand, is urging banks to step up their risk management, on the other it's telling them to help companies in difficulty. The National Business Daily this week cited a circular from the regulator telling banks not to suspend lending or withdraw loans to companies at will.

Mortgage loans remained a significant source of lending in July. But some analysts question how long that can continue as authorities in an increasing number of cities re-impose curbs on purchases to rein in home-price growth even as other cities encourage buying to reduce the stock of unsold homes.

Property sales remained robust into July. Data from Centaline Property showed sales in Beijing were up 5.3% on month to 4,933 units in July with the average price gaining 9.3% m/m to a record of CNY37,566 per square meter. In Shanghai, sales of new homes by area were up 5.2% m/m to 1.314 mln square meter with average prices rising to a new record of CNY37,319 per square meter, up 1.9% m/m.

Mortgage lending has surged amid a recovery in the residential property market that started in the second half of last year after the government reversed its tightening policies, developers started offering discounts to clear their stocks and investors shifted profits from a short-lived bull run in the stock market into property.

The People's Bank of China only breaks out mortgage lending on a quarterly basis, but monthly data on long-term household loans, which mostly comprise mortgages, show new loans were a record CNY563.9 billion in June, up slightly from CNY528 billion in May and almost double the figure a year earlier.

Some analysts are already raising the red flag. Haitong Securities warned a bubble is building in the sector and questioned consumers' ability to repay loans.

Haitong analyst Jiang Chao said the leverage ratio as measured by the mortgage loan divided by purchase cost climbed to a record high of 56.5% in the first half this year, up from 36.7% in 2015 and just 17.3% in 2011.

He warned the ratio of new mortgages to GDP rose to 6.4% in the first half, far higher than Japan's historical high of 3.0% and is close to the U.S. historical high of 8.0% recorded before the sub-prime mortgage crisis.

--MNI Beijing Bureau; +86 (10) 8532-5998; email:
--MNI Singapore Bureau; tel: +65 9189-5705; email:

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