New yuan lending drops, monetary loosening expected

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Chinese financial institutions lent less-than-expected new loans in yuan in April as the economy continued to slow, strengthening expectations for further monetary loosening.

New yuan-denominated loans reached 681.8 billion yuan (108.2 billion U.S. dollars) in April, down 61.2 billion yuan compared with a year earlier, China's central bank said Friday.

The figure was far below market estimates of around 800 billion yuan, following weak monthly data on investment, industrial output and consumption released Friday.

April's yuan lending was also the lowest this year, compared with 1.01 trillion yuan loaned in March, 710.7 billion yuan in February and 738 billion yuan in January, according to the People's Bank of China (PBOC).

"There was an obvious decline in credit needs in April," said Lian Ping, chief economist with the Bank of Communications. "Government policies should put more emphasis on boosting demand in the future."

Financial regulators should unleash liquidity, drive down market interest rates, reduce corporate financing costs and speed up bank lending, Lian suggested.

Of the new yuan lending, medium- and long-term loans now account for less than 25 percent, well below the 50 percent level in previous years, showing large companies' borrowing demand has shrunk markedly, said Liu Yuhui, a financial researcher with the Chinese Academy of Social Sciences, a government think tank.

"April's low lending may foreshadow further slumps in imports and investment in future, affecting the economic trend in the second quarter," he said.

China's imports edged up only 0.3 percent year-on-year in April while exports climbed 4.9 percent, both well below market estimates.

Urban fixed-asset investment rose 20.2 percent from the year before in the first four months, the slowest pace since the 17.4 percent growth recorded in 2002, the National Bureau of Statistics (NBS) said Friday.

In April, industrial value-added output grew 9.3 percent year-on-year, its lowest pace in nearly three years, while retail sales climbed 14.1 percent, lower than the 15.2-percent increase in March.

Ba Shusong, an economist with the Development Research Center under the State Council, or China's cabinet, advised beefing up monetary support for the economy while maintaining a prudent policy tone.

"The government's fine-tuning measures made some difference, but it's not strong enough to reverse the downward trend," said Ba.

The PBOC on Thursday reiterated its stance of maintaining a prudent monetary policy in the months ahead, saying inflationary risks still deserve attention.

Analysts expect more reductions in the reserve requirement ratio for banks in the short term and interest rate cuts in the second or third quarter, but note that the central bank remains wary of price rebounds.

China's consumer price index, a main gauge of inflation, rose 3.4 percent year-on-year in April, easing slightly from the 3.6-percent rate registered in March, the NBS said Friday.

"All the indicators create more leeway for the central bank to adjust its policies," said Zhou Wenyuan, an analyst with Guotai Junan Securities.

Meanwhile, Liu said an outflow of deposits in April may slow bank lending growth in May and restrict future expansion of investment.

The PBOC data shows yuan-denominated deposits fell by 465.6 billion yuan in April, compared with a growth of 342.4 billion yuan in the same period of last year.

New loans in foreign currencies in April were worth 9.6 billion yuan, 39.6 billion yuan less than the same period last year, the PBOC said.

M2, a broad measure of money supply that covers cash in circulation and all deposits, rose 12.8 percent year-on-year to 88.96 trillion yuan at the end of April.

The growth was slower than the 13.4 percent rate a month earlier and the 14-percent annual target set by the government.

The narrow measure of money supply (M1), which covers cash in circulation plus demand deposits, climbed 3.1 percent year-on-year to 27.5 trillion yuan at the end of April. The increase was 1.3 percentage points lower than a month earlier.

Preliminary data shows the country's social financing, a measure of funds raised by entities in the real economy, totaled 959.6 billion yuan in April, 407.7 billion yuan less than the same period of 2011 and sharply down from 1.86 trillion yuan in March.

In April, cross-border trade deals settled in yuan reached 196.2 billion yuan, while yuan-denominated cross-border direct investment totaled 21.7 billion yuan, according to the PBOC.