- Banks extended 661.3 billion yuan (US$94.5 billion) in net new loans last month, sharply down from 1.69 trillion yuan (US$241.5 billion) in September
- National aggregate financing at the end of last month totalled 618.9 billion yuan (US$88.5 billion), down from 2.27 trillion yuan (US$324.4 billion) in September
New loans in China fell to their lowest level in almost two years in October with manufacturers being forced to lower their prices amid slowing economic activity.
Chinese banks extended 661.3 billion yuan (US$94.5 billion) in net new loans last month, well below the 800 billion yuan (US$114 billion) of loans estimated in a Bloomberg survey, and sharply down from the 1.69 trillion yuan (US$241.5 billion) in September, according to the data released by the People's Bank of China (PBOC) on Monday.
The level of new loans was the weakest since December 2017.
The weakness is likely to stay in the coming months due to slowing industrial demand and factory gate prices falling into deflationary territoryJimmy Zhu
National aggregate financing, also known as total social financing, at the end of last month totalled 618.9 billion yuan (US$88.5 billion), down from 2.27 trillion yuan (US$324.4 billion) in September, and compared with an estimate of 950 billion yuan (US$135.7 billion).
The slump in new bank loans followed news that China's consumer inflation rose to a eight-year high of 3.8 per cent in October due to soaring pork prices. China's producer prices also fell 1.6 per cent in October, a further drop from September's reading of minus 1.2 per cent and the largest decline since July 2016.
"The weakness is likely to stay in the coming months due to slowing industrial demand and factory gate prices falling into deflationary territory," said Jimmy Zhu, chief strategist at Fullerton Markets. "The PBOC is avoiding much stronger easing steps unless the headline (consumer price index) can moderate from here."
But China's economy is already facing headwinds from waning demand amid the ongoing trade war with the United States, while structural problems at China's domestic state owned firms and banks have also led to a deceleration of loan growth, particularly at small institutions, whose funding costs remain high.
According to data from the Institute of International Finance, China's absolute total debt level reached 303 per cent of gross domestic product (GDP) at the end of the first quarter.
Loans to companies represent 60 per cent of total loans in 2019, with around 15.5 per cent of total loans extended to firms seen as potentially risky, according to an earlier "Global Financial Stability Report" from the International Monetary Fund.
This figure, which is around US$1.3 trillion, is China's Achilles' heel, said Nathan Chow, economist at DBS Bank.
The gist of the matter is that the state owns both the enterprises and the banks. The costs of sustaining them compromises the effectiveness of monetary policy to buttress the real economyNathan Chow
"(China) is far from a Minsky Moment," said Chow, referring to a time when a market collapse is triggered by reckless speculative activity undertaken when a market is on the rise.
"Household balance sheets are still lowly leveraged. But the gist of the matter is that the state owns both the enterprises and the banks. The costs of sustaining them compromises the effectiveness of monetary policy to buttress the real economy."
Growth in M2 money supply, which includes cash, deposits and highly liquid assets like bills of exchange, stood at 8.2 per cent in October, unchanged from September and in line with economists' forecasts.
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