OPINION: China’s July Economic Data Reveals Market’s Diffident Expectations

An array of economic data for China’s economy in July indicates a moderate slowdown in investment and production, despite the multiple government and monetary stimuli taken at the same time. Growth of M2 was 13.5%, lower than the corresponding period of last year. The data also demonstrated discouraged corporate and social financing.New loans increased in July were only 385.2 billion, falling far below the expected 700 billion as well as previous month’s 1.08 trillion. This figure has thus become the lowest since 2009.
Sheng Songcheng, PBoC’s director of Statistics Division,instantlyclarifies the steep fall in M2 growth as attributable to stricter regulations on interbank lending and the decreased amount of funds outstanding for foreign exchange. He also cited historical data, which shows July tends to be a month of shrinking lending statistics, as well as June’s data, that may somehow overdraw July’s lending potential.

However, the sudden fall of banking statistics ismore of an indication of the market’s diffidence to invest, due to rising risks in property market and credit defaults in the banking system, although these risks are still controllable at current stage. A mismatch between demand and supply essentially discouraged investors and banks from loans. Real estate projects are held back because of housing market’s malperformance, which is partially due to homebuying and mortgage restrictions. Small and micro businesses are faced with excess capacity, and existing venturessuffer from decreasing business orders in the market for property construction. Banks lowered risk preferences and theyhesitate to loan out even with abundantliquidity. The biggest threat still lies in the housing market thataccounts for one fifth of the economy, which has been experiencing cyclical falls since the beginning of 2014.

To underpin the descending housing market, Ministry of Housing and Urban-Rural Development has acquiesced in cancelling restrictions on home-purchaseand mortgage for many non-mega cities. At monetary level, the PBoC has showed full discretion in releasing expansionary forward guidance and the speaker of PBoC pre-disclosed early statistics of August to demonstrate economic stability. While PBoC’s targeted easing schemeto support fiscal expansion is yet to yield concrete growth, the oriented nature of such policy behaves as a disincentive to and crowds out the real economy, as the real cost of borrowing remains high. If the third quarter growth rate falls below 7.6%, the reputed economic microstimulation would expect a transformation into moderate, or stronger, incentives. An all-round reduction in the reserve requirement ratio, loan-to-deposit ration or the interest rate is to be anticipated, along with an overall liberalization for transactions in the property market. 

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