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China's Lending Data Put Policymakers in a Dilemma

China's may lending data have put policymakers in a dilemma over whether to tighten, loosen or pause monetary policy, according to Barclays Capital.

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Broad money supply (M2) grew 15.1 percent in May over the previous year, the slowest rate of growth in 30 months. Only $85.1 billion of new yuan loans were created in the month, much less than the $95.1 billion that was expected by analysts.

Barclays says the latest data will increase pressures on policymakers from local governments, banks, corporates and small and medium enterprises (SMEs) to pause the current round of tightening.

"While we continue to look for one more interest rate hike in June and believe it is too early to loosen, there is a risk that it could be pushed back to early July,” the bank said in a report on Monday.

HSBC also issued a report Monday, in which it said that while the data showed tighter monetary policy had begun to filter through to lending, it was too early for Beijing to ease up.

"We continue to expect another 100 [basis point] reserve ratio and another 25 [basis point] rate hikes in the coming months, if not weeks. Concerns about over-tightening are unwarranted given that the current pace of monetary growth at around 15 percent is more than sufficient to support economic growth of around 9 percent," HSBC's Qu Hongbin and Sun Junwei wrote.

In fact, HSBC said the data was a positive sign given the historical relationship between the consumer price index (CPI) and money supply growth (M1 and M2).

"CPI should be peaking soon, given that both M2 and M1 growth have already peaked out. So long as the current set of tightening measures is kept in place for another 2-3 months, inflationary pressures should show meaningful signs of decline after 3Q," the bank said in its note.

But it is the distribution of the liquidity, rather than the liquidity itself that is a bigger problem, according to Credit Suisse.

In its analysis of the lending data, the bank said that big lenders were trying to keep their biggest customers, the large state-owned enterprises (SOEs) happy, which was creating a credit squeeze for SMEs.

Credit Suisse said small and medium sized companies and exporters in the provinces of Zhejiang, Fijian and Guangdong were especially hard hit and unless the situation changed that would lead to lower demand and higher accounts receivables.

"For now, our base-case scenario is a soft landing for the economy in 2H11, largely anchored by stable private consumption, but the risk of a hard landing is on the rise, in our judgment," Dong Tao, research analyst at the bank wrote.

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