China Credit Slowdown Accelerating, but Still Outpacing GDP

Fitch Ratings says that broad credit growth in China continues to decelerate, adding to recent pressures on the economy. The agency highlights that 2012 is shaping up to be the first year since 2008 that the net amount of new credit extended to the economy falls below the prior year.

Even with a modest economic stimulus such as the one recently announced, Fitch’s adjusted total societal financing (TSF) measure is on pace to reach CNY16.5 trillion to CNY17 trillion in 2012, down from 2011’s CNY17.5 trillion. Absent stimulus, credit growth could be even lower.

“Broad credit growth began to moderate in the second half of 2011, and this slowdown has accelerated in 2012,” said Charlene Chu, head of Chinese banks’ ratings at Fitch. “Weakening demand for credit, as well as resource contraints from thinning bank liquidity, has been weighing on bank lending.”

Fitch notes that offshore credit has been particularly sluggish amid renewed China hard landing fears and European banks’ deleveraging. Domestic nonbank credit has been more resilient, but is expected to come in below 2011 levels.

The slowdown in credit is being met with an equivalent moderation in gross domestic product (GDP) growth, suggesting that the economic return on credit remains weak. Fitch estimates that in 2012 each CNY1 in new financing will yield only CNY0.39 in new GDP versus CNY0.73 pre-crisis.

“Since the global crisis, the Chinese economy has become increasingly reliant on abundant, cheap financing to propel GDP growth. Therefore, it is not a surprise to see GDP growth slowing in tandem with broad credit growth,” Chu said. “By the same token, it will be difficult to see a significant turnaround in economic growth absent a rebound in credit.”


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