October 16, 2014 / 2:40 AM / 4 years ago

China September data shows loan recovery but weak investment, forex outflows cloud picture

BEIJING (Reuters) - China’s banks increased lending in September, supporting Beijing’s efforts to guide capital into the struggling economy, but foreign investment remained weak and forex reserve data showed signs of potential capital flight.

Other data this week was also mixed, with exports and imports beating expectations but consumer inflation slipping to its lowest in nearly 5 years, pointing to broader weakness in the economy and reinforcing expectations that authorities will need to roll out more stimulus measures.

Together, the numbers appear to point to an economy which continues to gradually cool, though it may be at less risk of a sharp slowdown than feared just a month or two ago.

September industrial output, retail sales and investment numbers will be released on Oct 21 along with third-quarter GDP, which is expected to show the world’s second-largest economy grew at its weakest pace in more than five years as sluggish domestic demand and a rapidly cooling property market weighed on other sectors.

New yuan loans in September came in at 857.2 billion yuan (87.56 billion pounds), exceeding a Reuters poll handily, while broad money supply rose 12.9 percent, in line with forecasts.

Total social financing, a homegrown indicator which attempts to measure all credit creation in the economy including shadow banking, grew modestly.

Economists said much of the increase in lending appeared to be traditional loans linked to genuine economic activity, as opposed to riskier ones which are often used for speculative activities in the shadow banking sector, which are harder to detect and regulate as banks move them off their balance sheets.

“It’s encouraging that new loans are back under the supervised sector of the economy, but these things can change fairly quickly,” said Annette Beacher, head of Asia-Pacific Research at TD Securities in Singapore.

“So we take it at the face value that it’s encouraging growth and it’s not due to off-balance sheet (activities).”

The People’s Bank of China (PBOC) has been steadily easing policy this year by cutting reserve requirements for selected banks and guiding short-term money market yields lower to help bring down borrowing costs.

However, it has tried to do so in a way that has steered credit to firms producing real products and services, as opposed to enabling companies to take advantage of cheap credit to engage in speculative activities.

Worries that an excessive crackdown on shadow banking could further hurt China’s shaky economy were reinforced in July when TSF unexpectedly hit a six-year low.

The shockingly weak July figures came amid signs that Chinese banks were growing increasingly reluctant to lend, reducing their long-term exposure and focusing on keeping loan tenors short. That in turn implied credit was being used to keep firms afloat and roll over standing debt, as opposed to productive investment.

“The authorities will likely place more importance on financing data in the coming months, especially in light of the relaxation of mortgage rules and the cuts in the 14 day repos, to gauge lending appetites before deciding whether to introduce more easing measures,” said Chester Liaw, an economist at Forecast Pte Ltd in Singapore.

Last month, the central bank reportedly injected a combined 500 billion of liquidity into the country’s top banks via a policy tool known as the Standing Lending Facility (SLF) to support the economy.

“Overall, China’s monetary data suggested that shadow banking activities have been diminishing amid property weakness, and the genuine demand for credits still remains soft,” wrote Liu Ligang and Zhou Hao of ANZ in a research note.

CONFIDENCE PROBLEMS

China’s foreign exchange reserves, the world’s largest, fell slightly to $3.89 trillion at the end of September from $3.99 trillion at the end of June, central bank data showed.

The decline suggested speculative “hot money” outflows from China amid increased market jitters about whether the world’s second-largest economy may be at risk of a sharper slowdown, analysts said.

“We actually had a much higher trade surplus so that means there must be a lot of outflows outside the trade account or current account,” said Kevin Lai, senior economist at Daiwa Capital Markets in Hong Kong.

Meanwhile, foreign investment interest in China remained tepid as the economic outlook clouded.

China drew $87.4 billion in foreign direct investment (FDI) in the first nine months of 2014, down 1.4 percent from a year earlier, marking the third consecutive month of net decline, but monthly investment recovered slightly after a sharp drop in August.

In September, China attracted $9.0 billion in FDI, up 1.9 percent from a year earlier, the ministry said. That compared with a 14 percent slide in August to $7.2 billion, a level not seen since February 2012.

Foreign investment in China’s manufacturing remains weak in the face of wobbly economic indicators, aggravated by widespread uncertainties about the direction of China’s industrial policy toward foreign firms. FDI declines were led by plummeting investment in China from Japan, the U.S. and Europe.

Many have blamed Beijing’s campaign to crack down on alleged corruption and monopolistic behavior by foreign firms, which has received high-profile media attention. While firms are unlikely to try to unwind existing investments, which would damage relations with the government, increasing political and economic risks may cause them to put fresh investments on hold.

Still, investment flows appear to be adjusting in line with longer-term trends in the Chinese economy and the government’s aim to rebalance the economy towards more domestic demand and less reliance on exports.

China’s service sector, for example, has retained its attraction for foreign investors, with net investment up 8.7 percent year-on-year to $48.6 billion, whereas the manufacturing sector continued to drag, attracting only $29.6 billion, a slide of 16.5 percent.

STILL LOOKING FOR A SOFT LANDING

Most economists remain concerned about the direction of China’s economy, but few viewed the September data as signalling a dramatic worsening of conditions that would prompt a major policy adjustment.

“Even with the targeted and small-scale fiscal stimulus (announced so far), the partial unwinding of cooling measures being implemented in the property market and moves to bolster lending to targeted sectors and liquidity injections, market players remain unconvinced that China can sustain growth near the 7.5 percent growth target going into 2015,” OCBC economists said in a research note.

“But a hard landing, defined as closer to the 5-6 percent region, is still a low probability event in the next 6-12 months.”

Additional reporting by Shao Xiaoyi; Writing by Pete Sweeney; Editing by Kim Coghill; Editing by Kim Coghill

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