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PBOC Says Sharp Drop in Lending Due to Local Government Debt Swaps

PBOC Says Sharp Drop in Lending Due to Local Government Debt Swaps

Daniel Dubrovsky, Strategist

Talking Points

  • PBOC released a statement following April’s Yuan loan and financing figures
  • New Yuan Loans (CNY) grew 555.6 billion last month versus 800.0b anticipated
  • A PBoC statement says the loan slowdown was affected by local government debt swap

Having trouble trading the Chinese Yuan? This may be why.

The People’s Bank of China released a statement a day after the country reported a sharp slowdown in lending. In April new loans added up to 555.6 billion Yuan, far smaller than the 800.0b expected, and less than the 1370.0b reading in March. This is the smallest amount of currency loaned into circulation since October 2015. The aggregate financing figures also disappointed coming in at 751.0b Yuan versus 1300.0b expected and 2336.0b in March.

In its statement, China’s central bank said that the reduction in lending was a result of multiple factors. The first variable was an increase in local government debt swaps which accounted for roughly 350 billion Yuan. Seasonal factors contributed to the decline in loans as well with members emphasizing that the first quarter typically witnesses heightened lending. In addition, the PBOC is pressuring banks – using asset background quality control - to be more cautious when lending to avoid bad loans. These measures come amid a backdrop where the nation’s debt-to-GDP ratio is now above 240%.

In March, the People’s Bank of China gave GDP growth a target ‘range’ for the first time since 1995. This objective comes accompanies success in slowing the world’s second largest economy to its most conservative pace since 2009. A slowdown in financing may not bode well for the country’s GDP target. However, the PBOC also said in its financial statement that prudent monetary policy has not been changed. The central bank said that it will maintain a flexible and appropriate policy to promote stable economic growth in the next phase.

Data Extracted from Bloomberg

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