CICC: Several New Phenomena in Financial Data

CICC commented on the July financial data, pointing out several new phenomena: social financing accelerated but credit was weak, reflecting the trend of private deleveraging and government leveraging; loan interest rates remained flat, indicating a change in the operating philosophy of financial institutions; a significant increase in non-bank deposits supported active financial investment; fiscal spending drove M2 growth; M1 growth was higher than last year but with limited upward space. Overall, the year-on-year growth rate of money supply in the third quarter is expected to improve, with the subsequent trend depending on the strength of counter-cyclical policies

There are several new phenomena in July's credit and financial data worth noting. First, social financing continues to accelerate while credit remains weak, reflecting to some extent the trend of private deleveraging and government leveraging in the second half of the financial cycle, as well as seasonal factors. Second, although July's credit data is relatively weak, loan interest rates remain stable at low levels, which may reflect a trend change in the operational philosophy of financial institutions, no longer purely pursuing "volume at the expense of price." Third, active financial investment may be an important supporting factor for the significant increase in non-bank deposits, which is consistent with the strong performance of the stock market. Fourth, fiscal expenditure may be an important driving force supporting M2 growth. Fifth, M1's month-on-month growth rate has been relatively high in the past two months, influenced by active financial investment and possibly related to the low base caused by tariff disturbances in April and May. Under the baseline scenario, we believe that M1 growth for the entire year will be higher than last year, but the room for M1 growth to continue to rise significantly is limited. Overall, the year-on-year growth rate of money supply in the third quarter is likely to continue to improve, and the sustainability of this trend after October will depend on the strength of counter-cyclical policies.

The July social financing and credit data reflect the trend of private deleveraging and government leveraging during the downward phase of the financial cycle, as well as seasonal factors. With government bond financing increasing by 555.9 billion yuan year-on-year, new social financing reached 1.16 trillion yuan, an increase of 389.3 billion yuan compared to the same period last year. The growth rate of social financing slightly increased from 8.9% in June to 9.0% in July, with a small year-on-year increase. New credit in July was -50 billion yuan, showing a significant change compared to June. Since 2023, the credit data for July, especially the loans included in social financing, has not been strong, with monthly loans included in social financing not exceeding 50 billion yuan, and there were also instances last year where monthly loans included in social financing were negative. The changes in the above data may be due to seasonal operations of banks in loan disbursement (large month in June, small month in July), as well as the impact of local debt replacement, and also reflect the trend of private deleveraging and government leveraging in the second half of the financial cycle. During the downward phase of the financial cycle, fiscal expansion is a tool for stabilizing growth. The financial cycle refers to the long cycle formed by the mutual reinforcement of housing prices and credit. In this broader context, new credit from January to July this year reached 12.9 trillion yuan, which may be roughly on par with the same period last year after considering debt replacement.

Although July's credit data is weak, loan interest rates remain stable at low levels, which may reflect a trend change in the operational philosophy of financial institutions, no longer purely pursuing volume at the expense of price. In the past, when credit data faced significant downward pressure, banks would lower loan interest rates to pursue credit scale. However, since the LPR was lowered in May this year, the new corporate loan interest rates and new personal mortgage rates we tracked have remained stable at low levels and have not continued to decline. Even though there were significant fluctuations in July's credit data, loan interest rates remained basically stable: The new corporate loan interest rate in July was 3.2%, and the new personal mortgage rate was 3.1%, roughly consistent with the levels in April this year and remaining at historical lows. This change in the relationship between quantity and price may reflect a gradual trend adjustment in the operational philosophy of financial institutions, indicating that the "scale complex" of pursuing volume at low prices may have weakened, shifting towards greater emphasis on the asset quality and sustainability of credit business This is consistent with the phenomenon we observed in the report "Where is the Bottom of Interest Rates | Long Cycle Series (II)": As the interest rate spread narrows, banks tend to raise loan standards and pay more attention to the stability of asset quality.

Active financial investment may be an important supporting factor for the significant increase in non-bank deposits. A prominent feature in July was the substantial increase in deposits from non-bank institutions, with new non-bank institution deposits reaching 2.14 trillion yuan in July, an increase of 1.39 trillion yuan year-on-year. This is not the first time this year that there has been a significant increase in deposits from non-bank financial institutions; in April, new deposits from non-bank financial institutions also set a record high for the past decade. We believe this may reflect the increasing activity of financial investment in the private sector against the backdrop of declining deposit rates. Considering the rise in government bond yields and the decline in interest rate bond prices in July, the relative attractiveness of fixed-income assets is weak, and new deposits from non-bank financial institutions may have flowed more into the stock market.

Fiscal policy may be one of the important drivers supporting M2 growth. In July, the year-on-year growth rate of M2 reached 8.8%, continuing to rise from the previous month. After adjusting for seasonality, the month-on-month growth rate of M2 is also strong, with an annualized month-on-month growth rate of 12.8% in July, partly due to the accelerated release of fiscal deposits. In July, government bond financing increased by 555.9 billion yuan year-on-year, but fiscal deposits only increased by 124.7 billion yuan year-on-year, and the year-on-year growth rate of fiscal deposits did not continue to rise, indicating that the marginal release of fiscal deposits may have accelerated. Against the backdrop of private sector deleveraging, fiscal policy is an important driving force supporting the growth of money supply.

What the market is most concerned about may be the growth rate of M1. The year-on-year growth rate of M1 has risen in the past two months, and the month-on-month growth rate is also strong. How should we understand the trend of M1 growth? In July, the growth rate of M1 reached 5.6%, continuing to rise from the previous month, with an annualized month-on-month growth rate exceeding 6%. We tend to believe that the month-on-month growth rate of M1 in the past two months is influenced by active financial investment and may also be related to the low base caused by tariff disturbances in April and May. In April and May of this year, the seasonally adjusted month-on-month growth rate of M1 experienced consecutive negative growth, which may be related to the impact of U.S. tariff expectations on the export supply chain from early April to mid-May. Under the influence of tariffs, corporate operating expectations were unstable, leading to a pause in stocking and production, which significantly reduced the demand for demand deposits. In April of this year, M1 annualized decreased by 13.1%, almost approaching the decline in M1 when measures were taken to curb capital turnover last April. We tend to believe that this decline reflects an exogenous shock rather than endogenous changes. With the landing of China-U.S. economic and trade negotiations, export expectations have somewhat recovered, and the month-on-month growth rate of M1 was relatively high in June, but it has already declined in July. Therefore, under the baseline scenario, we believe that the growth rate of M1 for the entire year will be higher than last year, but the space for the growth rate of M1 to continue to rise significantly is limited.

In summary, the year-on-year growth rate of money supply in the third quarter is likely to continue to improve, but whether this trend can be sustained after October depends on further policy support. Considering last year's low base and the still relatively high growth rate of fiscal deposits, we expect that the improvement in the year-on-year growth rate of money supply in the third quarter will still have some continuity, and the peak year-on-year growth rate of M2 may reach above 9% The growth rate of M1 may reach around 6%, while the growth rate of social financing is likely to operate steadily, with limited room for further increase. Money is the liability side of banks, while credit and some government bonds are on the asset side of banks. The growth of the liability side requires support from the asset side. Against the backdrop of private deleveraging, whether money can maintain healthy growth after the fourth quarter will depend more on macro policies supporting the asset side.

Chart 1: The year-on-year and month-on-month growth rates of social financing both increased in July