January typically sees a sharp increase in loan growth compared to December, as Chinese banks tend to book loans early in the year. But this year’s jump is significant, even on an annual basis. This indicates that underlying economic activity is stronger than last year.
Loan growth jumped
Yuan loan growth rose 11.5 percent year-on-year to 3.98 trillion yuan, meaning outstanding loans stood at 196.65 trillion yuan at the end of January. Most of the loan growth came from longer-term business loans.
These business loans signal growth in business investment. This is in line with our expectation that investments in semiconductors, telecommunications, healthcare, data privacy and hardware infrastructure projects started in January. Accelerating loan growth points to positive investment momentum in the first and second quarters. We should see an increase in services and manufacturing activity in the area of IT and construction materials processing in a few months.
The main issuer of bonds was the government
In terms of bond issuance, the largest issuers are local and central governments, where the net issuance amount was 6.026 billion yuan, higher than the corporate issuance of 5.799 billion yuan. One explanation is that infrastructure funding must come in part from local governments. Another factor is that credit premiums for businesses are still high due to the potentially high default risk of property developers.
Shadow banking continues to slow
Entrusted loans and trust loans contributed a relatively small share of overall credit growth, which the People’s Bank of China intended to do. But we still saw an increase in undiscounted bills of 4.731 billion yuan. Recently, the PBoC stated that the issuance and use of these undiscounted invoices should be based on genuine business commerce. According to some media, banks receive deposits in the undiscounted sector. The PBoC statement means banks will issue fewer bills. This will affect the volume of new deposits and the deposit rate may need to increase. This increase in the deposit rate should be offset, in our view, by reductions in the prime loan rate in 2022, and these reductions should be applied at the beginning of the year in the first half of the year. So, abstracting from the effect of lower rates, the deposit rate in China could be stable.
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