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China's Stagnant Bank Lending Spooks Investors

Chinese bank stocks fell on Thursday in Hong Kong after a report by Shanghai Securities News that new lending by China’s four biggest state-owned banks was flat in the first two weeks of May.

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Shares of Industrial and Commercial Bank of China , China Construction Bankand Bank of Chinadeclined nearly 3 percent each by 3.30 pm Hong Kong time (7.30 am GMT).

“It’s not that banks don’t have money to lend but the market is focusing on the demand side of the story,” said Phillip Chan, Director at Shenyin Wanguo Securities in Hong Kong. “They’re looking at the fact that there is continued weakness in the economy and there is generally less credit demand this year.”

According to Shanghai Securities News, two of the big lenders posted higher loans in the two weeks to May 13, while another two saw their loans fall from a month ago.

Chinese banks extended a total of 7.47 trillion yuan ($1.18 trillion) in new loans in 2011, about 6.4 percent lower than the 7.95 trillion of credit extended in 2010.

The news added to growing worries that China’s slowdown is much sharperthan the headline gross domestic product (GDP) number suggests. Bank lending is seen as an important indicator of China’s economy.

While Beijing's move on Saturday to cut bank reserve ratios to 20 percent is seen as boosting lending capacity by about 400 billion yuan, many analysts have said that the government needs to roll out more aggressive fiscal response to bolster its sagging economy, Reuters reported.

According to Jim Antos, who covers Chinese banks for Mizuho Securities, continued weakness in credit demand shows that the economy is “faltering.”

“It's clear from recent macro data releases that the mainland economy is starting to slump,” Antos said. “It just seems there is less money sloshing around the system in China now compared to the past few years. When the velocity of money slows, an economy is faltering.”

In a report issued earlier this month, Mike Werner, Senior Analyst at Sanford Bernstein pointed to weak loan growth in the month of April, describing it as “disappointing”.

New loans in April grew 8 percent from a year earlier to 682 billion yuan, lower than the 13 percent increase the market was expecting, Werner wrote.

By CNBC’s Jean Chua

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