In China, the money and credit data provided further explanation of the weak growth data. M2 growth unexpectedly dropped further from 11.6% yoy in March to 10.1% yoy in April (consensus: 11.9%; SG: 11.8%). M1 growth ticked up modestly from 2.9% to 3.7%, but M0 growth fell again from 6.2% to 3.7%. Clearly, the impact of the 100bps RRR cut on 19 April did not materialize, but it should be more visible in the May data. However, given that interbank rates started to fall persistently in early April, the lack of stabilisation in money data so far seems to confirm our view that the monetary policy lag has lengthened notably. Consistent with the trend in money growth, total credit growth also dipped further, from 12.8% yoy to 12.2% yoy. Even new bank loans disappointed in April, coming in at CNY707.9bn, down CNY67bn yoy. Consequently, bank loan growth slowed for the first time this year. This was probably a major reason behind the sharp deceleration in infrastructure investment. In the meantime, shadow banking deleveraging continued as anticipated, likely due in part to tightened regulations on margin financing for the equity market. Although the PBoC responded to the weak data with a 25bp rate cut on 10 May, more policy easing needs to follow in reaction to the worrying trends in investment and credit. One more 25bp interest rate cut is expected, albeit with deposit rate ceilings raised or removed completely, and two more 50bp RRR cuts by the year end. Since interbank rates have fallen significantly, the next move is more likely to be a policy rate cut than an RRR cut. However, fiscal policy should now shoulder more responsibility, notes Societe Generale. Banks’ risk aversion and weak private sector credit demand has greatly mitigated the impact of monetary policy easing, but the on-budget fiscal policy has more room. Tax cuts and funding for infrastructure projects by the central government, policy banks included, are the best options with the least number of side effects. In addition, housing sector policy should also be relaxed further. Lowering the down payment requirement for first-time buyers and improving mortgage accessibility may help boost housing demand in lower-tier cities, which are suffering the most at the moment.
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