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China's monetary and fiscal policies continue to loosen
By Song Yu and Zhang Yin |
July 17, 2012, Tuesday
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Print Edition
Print Edition
CHINA'S commercial banks extended 919.8 billion yuan (US$144.4 billion) in loans in June, up from 793.2 billion yuan in May. Outstanding yuan loans grew by 16.0 percent year on year in June, up from 15.7 percent in May. M2 growth hit 13.6 percent year on year in June, down from 13.2 percent in May. Total social financing also rose rapidly to 1.78 trillion yuan, up from 1.14 trillion yuan in May and 1.09 trillion yuan in June 2011.
Although yuan loans extended in June were broadly in line with market expectations, they were better than what some investors were expecting after knowing the Big Four extended a smaller amount of loans than in May.
The data also represented a continuous loosening of monetary policy, which together with the recent interest rate cuts, clearly shows the monetary authorities are willing to loosen monetary policy.
Furthermore, some commercial banks reported they were told by the monetary authorities to control their lending by the end of the month, which is a rare event in recent quarters since there has been relatively low demand for loans amid rising real interest rates and falling aggregate demand growth.
Even stronger
This indicates that had the authorities not conducted window guidance, actual loan growth would have been even stronger, which shows the monetary authorities also have the ability to loosen policy.
Equally important, fiscal policy continued to be supportive of economic growth.
Fiscal deposits went down by 236 billion yuan in June, 102 billion yuan more than the drop seen in June 2011 (Fiscal deposit tends to fall in June because of seasonal patterns in government expenditure. The more the level of fiscal deposit falls, the more the government spends or/and the less the government collects, and hence the more supportive it is for the real economy).
We believe this is consistent with government efforts to boost fixed asset investment growth which often requires fiscal expenditure, especially in terms of large transportation infrastructure projects the government is now focusing on.
This also helps to explain the stronger loan demand as more fiscal expenditure implies more borrowers qualified for banks' capital requirements (projects typically need to have 20-30 percent capital to be able to borrow from commercial banks).
Foreign exchange did not contribute to the loosening of broad liquidity conditions. The forex position (yuan used by the monetary authorities to purchase forex) remained very low at 49 billion yuan, a touch up from the 23 billion yuan in May but sharply down from the 277 billion yuan in June 2011.
We expect the government to have an even clearer loosening bias in the coming quarter as we anticipate inflation to fall further, while there is still a lack of evidence of a significant rebound in growth of economic activities yet.
Although yuan loans extended in June were broadly in line with market expectations, they were better than what some investors were expecting after knowing the Big Four extended a smaller amount of loans than in May.
The data also represented a continuous loosening of monetary policy, which together with the recent interest rate cuts, clearly shows the monetary authorities are willing to loosen monetary policy.
Furthermore, some commercial banks reported they were told by the monetary authorities to control their lending by the end of the month, which is a rare event in recent quarters since there has been relatively low demand for loans amid rising real interest rates and falling aggregate demand growth.
Even stronger
This indicates that had the authorities not conducted window guidance, actual loan growth would have been even stronger, which shows the monetary authorities also have the ability to loosen policy.
Equally important, fiscal policy continued to be supportive of economic growth.
Fiscal deposits went down by 236 billion yuan in June, 102 billion yuan more than the drop seen in June 2011 (Fiscal deposit tends to fall in June because of seasonal patterns in government expenditure. The more the level of fiscal deposit falls, the more the government spends or/and the less the government collects, and hence the more supportive it is for the real economy).
We believe this is consistent with government efforts to boost fixed asset investment growth which often requires fiscal expenditure, especially in terms of large transportation infrastructure projects the government is now focusing on.
This also helps to explain the stronger loan demand as more fiscal expenditure implies more borrowers qualified for banks' capital requirements (projects typically need to have 20-30 percent capital to be able to borrow from commercial banks).
Foreign exchange did not contribute to the loosening of broad liquidity conditions. The forex position (yuan used by the monetary authorities to purchase forex) remained very low at 49 billion yuan, a touch up from the 23 billion yuan in May but sharply down from the 277 billion yuan in June 2011.
We expect the government to have an even clearer loosening bias in the coming quarter as we anticipate inflation to fall further, while there is still a lack of evidence of a significant rebound in growth of economic activities yet.
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