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Why weak China loan data is actually good news

Huchen Lu | E+ | Getty Images

Underwhelming Chinese loan data prompted a selloff in the country's stock markets Tuesday, but some analysts say the data is good news as it signals China's credit problems are decreasing.

Hong Kong's Hang Seng was down near 2 percent by mid-afternoon in Asia, while the Shanghai Composite fell 1.4 percent, as investors interpreted the credit growth slowdown as another sign that China's economy is cooling, ahead of Wednesday's gross domestic product data.

Read MoreWill China's slowdown benefit the rest of the world?

According to global research house Capital Economics, the slump in credit growth shows authorities are starting to get credit woes under control.

"Despite a surge in bank loans and relatively loose interbank liquidity conditions in March, today's data show that the credit slowdown is still on track," said Julian Evans-Pritchard, China economist for Capital Economics.

"Much of the slowdown in broad credit continues to be in corporate bonds and trust loans, where a couple of high-profile defaults and a growing awareness of credit risks appear to have dampened investor demand," he added.

Investors have long been concerned about China's burgeoning credit market - particularly amid rising levels of shadow banking and an astronomical local government debt pile. Last month, the country's first domestic bond default in recent history underscored these worries.

Read MoreCredit problems to rattle China economy: New Zealand FinMin

According to the loans data, Chinese banks made 1.05 trillion yuan ($168.8 billion) worth of new yuan loans in March, in line with forecasts but well above the previous month's 644.5 billion yuan. Although new loan growth was robust, other elements of the data were more disappointing.

Total social financing - which includes bond issuance and trust loans - rose 16.2 percent on year in March, down from 17.1 percent in February. Meanwhile, credit growth slowed to 13.9 percent from 14.2 percent in the previous month, while M2 growth - a measure of money supply including cash and checking deposits, money market mutual funds - declined to a record low of 12.1 percent, below the consensus call of 13 percent.

Read MoreChina's Credit Bubble: Where Did All the Money Go?

"The year-on-year slowdowns in money and credit growth rates suggest near-term weakness in economic growth," said Jian Chang, economist at Barclays, who added that he had lowered his first-quarter growth forecast to 7.2 percent from 7.3 percent.

Meanwhile, Klaus Baader, chief economist for Asia Pacific at Societe Generale, told CNBC he also saw the data as a positive sign for China's long-term economic health.

"The data is clearly consistent with a further slowdown," said Baader. "Don't overlook the fact that yes, the loan data was reasonably strong, but the overall financing data - what they call social financing - was fairly weak and this was because trust loan growth had slowed down really dramatically."

"The credit boom is slowing and that is exactly what the authorities want. But if the credit boom is slowing the clear corollary is going to be is that economy is going to slow," he said.

Read MoreWill China's slowdown benefit the rest of the world?

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