China:New loans drop as the property market cools

Aggregate financing fell to RMB896.3bn in October, from RMB1.72trn in September, which was less than expected (Consensus: RMB1trn; Nomura: RMB1.1trn), but the growth of aggregate financing outstanding edged up by 0.2 percentage points (pp) to 12.7% y-o-y. The breakdown of aggregate financing suggests that shadow banking activity remained limited, while the share of loans in aggregate financing was high, at 67.1%. On a broader basis, growth in augmented aggregate finance (i.e., aggregate financing + local government bonds) edged up to 16.8% y-o-y in October.

    New loans fell substantially to RMB651.3bn from RMB1.22trn, weaker than expected (Consensus: RMB672bn; Nomura: RMB700bn), driven by cooling property transactions and weak corporate investment. New loans to households fell by more than 30% m-o-m to RMB433.1bn, largely reflecting the drop in mortgage loans as the volume of property transactions was reigned in. New loans to corporates plummeted to RMB168.4bn from RMB 621.7bn in September, suggesting corporate investment has turned weaker. However, because of a low base last year, growth of RMB loans outstanding rose to 13.1% y-o-y from 13.0% in September.

    Interbank deposits saw a sizable increase of RMB 523.1bn October, while household deposits decreased by RMB468bn, possibly reflecting a seasonal flow from household deposits to wealth management products. Government deposits increased significantly, due to seasonal effects of tax collection.

    M2 growth edged up further to 11.6% y-o-y in October from 11.5% in September, stronger than our expectation (Consensus: 11.4%; Nomura: 11.0%), suggesting that general liquidity conditions remain accommodative. M1 growth ticked down, but was still strong at 23.9% y-o-y in October, showing that the corporate sector is still hoarding liquidity rather than risky assets.

    Looking ahead, we expect M2 growth to moderate slightly, with property market transactions and mortgage loans slowing further. M1 growth may remain relatively strong until early next year when a high base effect will kick in.

    On the policy front, we maintain our call of no more cuts in the reserve requirement ratio or interest rates through the end of 2016, as policy tightening in the property sector leaves limited room for monetary easing.