China's New Yuan Loan
China's new yuan loan increased by CNY2.47 trillion in September, almost double the amount in August. At the same time, total social financing jumped to CNY3.53 trillion in the month from CNY 2.43 trillion in August.
This faster-than-expected loan growth in China is quite surprising as loan demand should have weakened, even though the economy has picked up slightly from more relaxed Covid measures. But there are very few details from the central bank on where the loans went.
One thing of note is that among all the items in total social financing, government bond net issuance jumped by more than CNY5 trillion in just one month. As reported by the central bank, the net increase in government bond issuance was only CNY 399.8 billion in July and CNY304.5 billion in August, and for the whole of the third quarter the net issuance of government bonds increased to CNY5.91 trillion. So, the net issuance of government bonds increased by CNY5.81 trillion alone in September.
This should help local governments experiencing financial pressures to push forward with completing unfinished residential projects, achieving the target of infrastructure investments this year. We also believe that some of these funds will continue to go toward Covid-19 testing.
This also means that the fiscal deficit as percentage of GDP should have increased steeply to over 5.3% in September, and we project that the number could reach 6-7% by the end of this year.
We expect the trend of faster credit and more government bond issuance to continue for the rest of the year. The economy is weak due to continuing Covid measures, the real estate crisis, and emerging weakness in external demand. That suggests government spending should continue to increase in order to provide enough job stability to ensure a soft landing.
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