China Dec bank loans post big miss, reliance on credit losing its potency

BEIJING, Jan 15 (Reuters): Cautious Chinese banks issued far less credit in December than expected despite a surprise rate cut by the central bank, driving cash-starved companies into the shadow banking system in a major blow to the government's financial reform efforts.
The weaker-than-expected loan data indicates Beijing's traditional reliance on credit to spark the economy is losing its effectiveness, posing a further challenge to policymakers as they look for ways to avert a sharp slowdown in 2015.
Despite instructions from the central bank to extend more loans in the final months of last year, analysts said banks were reluctant to lend as companies struggled to pay off existing debts and bad loans spiked.
"The slowdown of new loans in December suggests that China's commercial banks are still concerned about the credit risks in the traditional sectors," Liu Ligang, China economist at ANZ, wrote in a note.
"As the economy continues to slow and the risk of deflation looms large, we expect monetary policy to be eased further."
Chinese banks lent 697.3 billion yuan ($112.55 billion) in December, central bank data showed on Thursday. Economists polled by Reuters had expected lending to be little changed from the previous month at 852.7 billion yuan.
The People's Bank of China unexpectedly cut interest rates for the first time in more than two years in late November in an attempt to ease strains on companies desperate for funds and also loosened lending policy late in the year.
The central bank said in a statement on Thursday that it will maintain appropriate liquidity and steady credit growth in 2015, making targeted policy changes and making monetary conditions "not too tight or too loose".
China is likely to report next week that economic growth last year was the slowest in 24 years, and analysts predict a further loss of momentum in 2015 even if the government rolls out more stimulus. A cooling property market, excess capacity at factories and sluggish investment are all weighing on demand.
Growth likely slowed to 7.2 per cent in the fourth quarter, putting the economy on track to undershoot the official 7.5 per cent target for the full year, a Reuters poll showed. Some economists see 2015 growth below 7 per cent.
If the GDP data proves worse than expected, some analysts say the PBOC could cut interest rates further or lower reserve requirement ratios (RRR) for all banks. A reserve ratio cut would give banks greater capacity to lend, but many market watchers question if they would be willing to increase their exposure as economic conditions deteriorate.
Expectations of more stimulus made China's stock market the top performer in the world last year. Shanghai indexes rose on Thursday as the weak loan data fueled hopes of more support, taking their gains to over 60 per cent since June.
The loan data also showed more companies are lending to each other, possibly as big banks grow more risk averse. As intermediaries, banks charge a fee for these so-called "entrusted loans" but do not have to carry them on their books.