China Lending Unexpectedly Tumbles, Adding to Evidence Economy Is Slowing

China’s lending tumbled in May and money supply grew at the slowest pace since 2008, adding to signs that the world’s second-biggest economy is cooling.
Loans were 551.6 billion yuan ($85 billion), less than the 650 billion yuan median estimate in a Bloomberg News survey of 20 economists and 639 billion yuan a year earlier. M2, the broadest measure of money supply, rose 15.1 percent, the People’s Bank of China said on its website.
The Shanghai Composite Index slid 0.2 percent as the data fueled concern that interest-rate increases to combat inflation will trigger a slowdown. A report tomorrow may show that consumer prices jumped 5.5 percent in May from a year earlier, the biggest gain in almost three years, the median forecast in a Bloomberg News survey shows.
“This provides another data point highlighting the growth risk,” said Tao Dong, a Hong Kong-based economist for Credit Suisse Group AG. “I think the economy is heading to a soft landing in the second half of 2011, but the risk of a hard landing seems to be on the rise,” Tao said, adding that small companies are short of credit.
New loans in the first five months of the year totaled 3.55 trillion yuan, 12 percent lower than the same period last year and 40 percent smaller than in 2009 when credit surged to cushion the nation from the impact of the global financial crisis.
A moderating expansion in the Chinese economy is adding to concerns that global growth is faltering.

‘Elements of Fragility’

In the U.S., the world’s largest economy, the unemployment rate in May climbed to 9.1 percent, the government said last week, and a report tomorrow may show retail sales fell for the first time in 11 months. Japan’s economy shrank by more than economists estimated in the first quarter, government data showed last week, and European economies are struggling with debt restructuring.
“There are already elements of fragility,” Nouriel Roubini, the New York University professor and co-founder and chairman of Roubini Global Economics LLC, said in an interview in Singaporeon June 11. World expansion may slow in the second half of 2011 as “the deleveraging process continues,” fiscal stimulus is withdrawn and confidence ebbs, he said.
Non-deliverable yuan forwards traded at 6.3920 per dollar, indicating the currency may gain about 1.4 percent in the next 12 months.

Lending Squeeze

At Bank of America Merrill Lynch, economist Lu Ting said that “the chance of a hard landing is very small and the market could be overly concerned about a ‘lending squeeze’ in China.” Lu said that changes to the way that money-supply data is calculated may have contributed to smaller gains. He added that bank lending is “firmly under control.”
China has been reining in lending to control inflation and the risk that bad loans will swell after a record expansion in credit that was the nation’s main response to the global financial crisis. Companies pushing up prices have included McDonald’s Corp. (MCD), the world’s biggest restaurant chain.
The central bank has raised interest rates four times since September and also ratcheted up lenders’ reserve requirements to record levels. The benchmark one-year lending rate is now 6.31 percent and the one-year deposit rate is 3.25 percent.

Inflation Accelerates

Credit Agricole CIB today forecast one more rate increase this year, in June. Daiwa Securities Capital Markets economists led by Sun Mingchun also expect a boost this month in response to an acceleration in May inflation, with no further adjustments after that.
Citigroup Inc. sees one or two benchmark interest-rate increases in the “next couple of months.” Consumer prices may jump by about 6 percent in June and gains will remain elevated in the second half of the year, the bank’s Hong Kong-based economists led by Shen Minggao said in a note today.
“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,” Qu Hongbin, Hong Kong-based economist with HSBC Holdings Plc said in a report after today’s data was released.
China’s slower gains in manufacturing and industrial production have prompted “a shift in market worries from overheating to a hard landing,” UBS AG economist Wang Tao said in a May 31 report. While power shortages and de-stocking by companies will trim growth this quarter, the economy is set to expand more than 9 percent this year, according to Wang.
That pace would compare with International Monetary Fund projections in April of 2.8 percent growth in the U.S. and a 1.6 percent expansion in the euro area.
--Zheng Lifei in Beijing. Editors: Nerys Avery, Ken McCallum