Credit up in May on economic recovery

Credit growth quickened in China during May as the domestic economy gradually recovered from the novel coronavirus epidemic with monetary authorities expected to continue liquidity infusions and support infrastructure financing in the second half of the year, analysts said on Wednesday.

The People's Bank of China, the central bank, said aggregate financing stood at 3.19 trillion yuan ($451 billion) in May, up by 1.48 trillion yuan on a yearly basis. Aggregate financing is a measure of the funds that the real economy gets from the financial system.

Banks extended new yuan-denominated loans of 1.48 trillion yuan in May, up 298.4 billion yuan from a year earlier, the PBOC said. The broad measure of money supply that covers cash in circulation and all deposits, or M2, rose by 11.1 percent to 210.02 trillion yuan at the end of May, and the growth rate was unchanged from the end of April, the central bank said.

All the financial data indicated faster expansion of credit to support business resumption and coordinate the surge in government bond issuances, said Li Qilin, an analyst with Yuekai Securities.

Government debt rose in May, driven largely by local government special bond issuances, which jumped to 1 trillion yuan as local authorities were required to largely fulfill the preapproved bond quota by the end of May, according to the Ministry of Finance.

In order to keep liquidity at an ample level, the central bank pumped more cash into the banking system via reverse repos last month. A reverse repo is a process in which the central bank purchases securities from commercial banks through bidding, with an agreement to sell them back in the future.

The PBOC resumed its seven-day open market operations on May 26, breaking a near two-month hiatus with no fresh fund injections via this liquidity tool.

The central bank also innovated policy tools, such as a small business loan purchase program, and further delayed loan and interest repayments by small and medium-sized companies to support the real economy by channeling funds directly into the sectors. But analysts said these programs may reduce liquidity supplies to the interbank system and the available funds for buying government bonds.

The PBOC may further ease monetary policy through tools, such as reserve requirement ratio cuts, lending rate reductions and the re-lending mechanism to shore up M2 and aggregate financing growth on an annual basis, said Lu Ting, chief China economist with Japan-based Nomura Securities.

Pan Gongsheng, vice-governor of the PBOC, said at a news conference last week that the newly-launched temperate credit supportive programs are "not incompatible with RRR cuts and rate cuts".

The central bank pledged in its first-quarter monetary policy report that it will step up countercyclical adjustments to support the real economy, make the prudent monetary policy more flexible and appropriate, and continue to deepen reforms of the market-oriented interest rate and the yuan exchange rate formation system.