China Economy

China's stimulus appears to be 'finally kicking in' as new loans hit record high, experts say

Key Points
  • Analysts say surging bank loans and overall credit expansion to monthly records in China mean that official efforts to stimulate the economy are kicking in, a potential sign that slowing growth could bottom out by the first half of the year.
  • China had been cracking down on high levels of debt, but a slowing economy and the trade war with the United States forced officials to reverse course last year.
  • Economists and investors expect more stimulus but some say officials will need to make sure it doesn't get out of hand.
The People's Bank of China headquarters in Beijing.
Tomohiro Ohsumi | Bloomberg | Getty Images

New loans in China surged to a record high in January — and analysts say it could be a sign that government stimulus is "finally kicking in," which may be good news for the economy.

The world's second-largest economy expanded 6.6 percent in 2018, the slowest growth in 28 years.

The slowdown was in part due to official efforts to reduce alarmingly high debt levels which started three years ago. Clamping down on credit, in particular non-traditional forms of lending known as "shadow banking," suppressed economic activity and pushed growth lower.

But the onset of the tariff war with the United States and the pace of the slowdown forced a rethink. Last year, authorities began taking steps to encourage banks to lend more, cut taxes and support small- and medium-sized companies.

Record loans

Bank loans and total social financing — the country's broadest measure of credit — rose to a record high in January, according to China's central bank on Feb. 15.

New yuan loans hit 3.23 trillion yuan ($481.76 billion), while total social financing — which measures loans and bonds among other things — reached 4.64 trillion yuan. Those numbers took analysts by surprise.

The credit growth "indicates that the PBoC's easing efforts are finally kicking in, as liquidity is passed on from financial institutions to the real economy," Bank of America Merrill Lynch said in a note the day the data came out.

Strong credit growth to continue in China: Barclays
Strong credit growth to continue in China: Barclays

Jian Chang, chief economist for China at Barclays, said that credit has expanded "quite significantly" and she expects economic growth to pick up in the second-quarter, after bottoming out in the current first quarter.

Such a scenario depends on "more policy easing from the Chinese government," Chang told CNBC on Tuesday — a view echoed by other economists who say the government will likely accelerate stimulus to boost economic growth.

Too early to tell

However, some analysts disagree. They say that a close reading of the recent credit numbers tells a more nuanced story and that it's too early to call an end to the growth slowdown.

High levels of debt in a slowing economy mean that some borrowers are taking up new credit to pay off existing loans "instead of funding real economic growth," Japanese financial firm Nomura said in a note Tuesday.

"Moreover, with dual export and property market downturns, we struggle to see how real demand for credit will increase meaningfully," it said.

China is one of the world's most debt-burdened economies, which was what prompted authorities to crack down on loans.But with the economic slowdown, analysts and investors say authorities had little choice but to spur lending, in a bid to pump money back to the economy — despite the risk of increasing debt.

"We think near-term, it's good. But long-term, it is going back to the original problem actually," Kelly Chung, senior fund manager at investment firm Value Partners in Hong Kong, told reporters Thursday.

Louis Kuijs of Oxford Economics says he expects authorities to do their best to proceed prudently, as Chinese officials "don't want to be seen as 'overdoing' the stimulus and don't want to jeopardize the achievements in terms of containing leverage and reducing financial risks."

In a note Thursday, Kuijs said he thinks recent stimulus efforts that appear to be taking effect, combined with a "modest increase" in debt this year, will be enough for economic growth to bottom out in the second quarter.