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Chinese borrowing plunges as businesses, homebuyers stay on sidelines

Longer-term lending falls 40% in May in an uncertain economy

Speculation has emerged that the People's Bank of China will cut interest rates again to spark demand for longer-term funding.   © Reuters

BEIJING -- A key indicator of private-sector appetite for funding in China is down as businesses and consumers remain hesitant to make big investments in an economy disrupted by COVID-19 lockdowns.

New loans in China carrying a term of one year or longer plunged by 40% in May, falling for the 12th straight month. Longer-term borrowing typically funds home purchases and business investment in equipment, which boosts economic growth.

Total yuan loans rose by 1.89 trillion yuan ($280 billion) in net terms, the People's Bank of China said, up 26% on the year to rebound from a 56% year-on-year drop in April. But most of the May loans were short-term corporate borrowing, which surged by a factor of 11 as stressed businesses rushed to secure cash.

Borrowing by individuals was particularly weak, tumbling 76%. Coronavirus lockdowns and dashed hopes for a housing market upturn have discouraged prospective homebuyers from applying for mortgages.

Medium- to long-term loans for corporate borrowers decreased 15%. Besides weak capital spending, real estate companies are halting new development in light of a housing market correction.

Speculation has emerged that the People's Bank of China will cut interest rates again to spark demand for longer-term funding. The central bank lowered the five-year prime rate by 15 basis points in May. A cut of another 0.15 percentage points is possible, Zheshang Securities predicted.

The timid business sentiment also is illustrated by a measure of money supply. M1, a narrow metric that covers cash in circulation and demand deposits, increased just 4.6% on the year in May, slowing from a 5.1% rise in April.

In contrast, M2 -- a broader measure that consists of M1 plus time deposits and individuals' deposits -- increased 11.1%, the strongest growth since June 2020.

China began a credit refund of the value-added tax as a relief measure, increasing cash on hand at corporations. Businesses are transferring their tax refunds from demand deposits to time deposits, said GF Securities.

The business sentiment index compiled by Cheung Kong Graduate School of Business, which tracks many private-sector companies, deteriorated through May. Faced with persistent uncertainty, businesses have not committed to investing their tax refunds.

In contrast to slumping private-sector demand, public-sector borrowing is high. The combined public and private sectors raised 43% more new funds on the year from banks and investors in May. Government bond issuances grew 60%, including municipalities obtaining money for infrastructure projects, accounting for about 40% of new fundraising.

China's leadership has urged infrastructure investment at the local level as a driver of economic recovery. Beijing has instructed local governments to exhaust the authorized annual quota of 3.65 trillion yuan in special bond issuances by the end of June.

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