PBOC Expected to Loosen Monetary Policy and Cut Rates after April Decline in Household Lending

Household loans saw a sharp contraction in April, with domestic analysts now forecast a loosening of monetary policy from the People's Bank of China.

Domestic analysts expect the Chinese central government to further reduce interest rates and loosen monetary policy following a decline in lending to households in the month of April.

China's financial data for April disappoints

Official financial data for April fell short of expectations, following a strong start to the year which at first blush appeared to presage a robust recovery for China's economy from the Covid pandemic.

In April, renminbi loans increased by 718.8 billion yuan, for an expansion of 64.9 billion yuan compared to the same period last year, yet a sharp decline from the reading of 3.89 trillion yuan for March, according to data released by the People's Bank of China (PBOC) on 11 April.

Household loans decreased by 241.1 billion yuan, with short-term loans to households decreasing by 125.5 billion yuan, and medium and long-term loans decreasing by 115.6 billion yuan.

This contraction in household lending is especially disappointing for China's economic policymakers, given their ongoing push to increase the share of consumption in the Chinese economy.

By contrast, loans to enterprises and institutions increased by 683.9 billion yuan in April, despite a decline in short-term enterprise loans of by 109.9 billion yuan, and a fall in medium-term loans of 109.9 billion yuan. Long-term loans to enterprises and institutions increased by 666.9 billion yuan, while bill financing increased by 128.0 billion yuan, and loans from non-banking financial institutions increased by 213.4 billion yuan.

In April, the M2 money supply grew 12.4% in year-on-year terms, for a deceleration of 0.3 percentage points compared to the end of last month, yet 1.9 percentage points higher than the same period last year.

Domestic analysts impute the slowdown in the M2 growth rate to a decrease in household deposits of 1.2 trillion yuan in April.

While household deposits posted a sizeable decline in April, Wen Bin (温彬), chief economist at China Minsheng Bank, said this has not yet led to a boost in Chinese consumption.

"Household deposits decreased by 1.2 trillion yuan in April, for an increase of 496.8 billion yuan compared to the same period last year," Wen wrote in Sina opinion piece,

"At the same time, the early repayment of mortgages further increased in April, which will lead to a simultaneous reduction in house deposits and mortgage loans.

"In addition, the reduction of deposit interest rates and the marginal increase in the risk appetite of households will also lead to a decline in the willingness of households to save.

"However we have yet to see the transformation of excess savings into consumption, and corporate deposits are still not displaying a role in the process of stimulation.

"With the consumption confidence of households and their ability and willingness to buy houses remaining weak overall, household lending has weakened again and needs further acceleration and stabilisation."

Active fiscal and monetary policy on its way

Wen Bin expects the disappointing credit figures for April to spur policymakers to adopt more active fiscal and monetary policy.

"Overall, the current data show that the endogenous driving force of the economy still needs strengthening, and macroeconomic policies need to continue to maintain stability and continuity," Wen wrote.

"In particular, the coordination of fiscal and monetary policies should be strengthened to further boost the confidence of market actors.

"It is necessary to continue to give full play to the dual role of monetary policy tools in aggregate and structural terms, and continue to increase financial support for the real economy in order to consolidate the foundation for a steady economic recovery."

Interest rate cuts anticipated

Jiang Fei (蒋飞), chief macro-analyst at Great Wall Securities, expects the contraction in household lending to spur cuts to interest rates by the Chinese central bank.

"Household loans fell sharply in April and there was a net repayment," Jiang wrote in an online opinion piece.

"The direct financing scale of enterprises is also not high, which is consistent with the inflation data reflecting a bumpy road for the recovery of short-term demand (durable consumption, real estate sales) in the domestic economy.

"This year, the property market transaction area and housing prices could remain in an adjustment phase, and there could be considerable downward pressure.

"Consequently, it is still necessary to maintain a certain degree of interest rate cuts to hedge the downward pressure on housing prices...loose monetary policies including subsequent interest rate cuts can be expected."

Banks ordered to reduce deposit rates

PBOC's release of the disappointing financial data for April coincided with reports that Chinese banks had received directives to keep a lid on rates for certain types of deposits, in order deal with the problem of narrowing interest rate spreads.

Sources from multiple banks said to Securities Journal that authorities has issued directives requiring them to cap rates for call deposits and agreement deposits, with the upper limit for big state-owned banks set at 10 basis points above the benchmark, and at 20 basis points for other financial institutions.

According to analysts, the adjustment to the upper limit for the rates on call and agreement deposits is intended to guide Chinese banks in "strengthening debt cost management, rationally controlling deposit interest rates, and helping to guide banks to further reduce deposit interest rates."

In April, domestic analysts said they expected China’s financial regulators to permit further declines in rates on bank deposits, due to shrinking net interest margins amidst a push from authorities for lenders to extend more credit.

As of the end of 2022, the overall net interest margin of China’s commercial banks was 1.91%, for a decline of 17 basis points compared to the end of 2021, according to a report from Zhongtai Securities. 

According to Dai Zhifeng (戴志锋), chief banking sector analyst at Zhongtai Securities, the shrinking of net interest margins will prompt China’s financial regulators to permit declines in deposit rates, in order to shore up credit extension by Chinese banks as well as forestall risky lending behaviour. 

“Regulators still have the motivation to further reduce the liability costs of banks, and it is expected that bank deposit interest rates will slowly decline,” Dai wrote. 

“If the interest rates of bank assets are floating, but their liability costs remain high, then pressure on net interest margins will compress bank profits during a cycle of interest rate declines. 

“On the one hand, bank motivation to reduce lending costs is insufficient, which is unfavourable for the recovery of the real economy. On the other hand, under the pressure of interest rate spreads, some banks may increase their risk appetite, which is unfavourable for the stability of the financial system. 

“Consequently, regulators still have the motivation to further reduce liability costs for banks.”