China credit growth adds to long-term risks, but no imminent 'hard-landing'

Credit growth in Asia’s largest economy slowed dramatically in February, but some economists warned that seasonal factors were at play in the statistics, exaggerating the extent of the slowdown, although strong lending added to the long-term risks in China's economy.

Indeed, credit growth was in fact “a fair bit stronger” than at the end of 2015, Capital Economics said; hence, predictions of an imminent ‘hard-landing’ were overdone the think-tank said, although it added that the build-up in credit was adding to the long-term economic risks.

Outstanding bank loans rose by 727bn yuan in February, versus a 2.51bn yuan increase in the month before.

That was well below the 1.2bn which consensus had projected

Total social financing, the wider measure of credit conditions, which analysts track most closely, also registered an abrupt slowdown after the previous month’s surge.

TSF increased by 780bn yuan after jumping by 3.42bn yuan in the month before.

However, a drop in bankers’ acceptance bills and also a further fall in foreign currency loans offset increases in the other components of TSF, Capital Economics said.

“This dramatic pullback relative to February will raise questions but it is easy to be misled by seasonal distortions, particularly when focusing just on the figures showing the incremental increase in net credit each month,” Capital Economics’s chief economist Mark Williams said in a research note sent to clients.

Growth in outstanding credit was a better measure, Williams said, and if local government borrowing was included then it grew at a 14.7% year-on-year clip, down from the 15.2% pace seen in the month before but nonetheless still a “fair bit stronger than at the end of last year”.

That was consistent with the view that “monetary loosening is succeeding in channelling more credit to the economy but credit growth at these rates is not sustainable and will add to long-term economic risks,” Williams concluded.