Sell-side Still Looking For Easier Policy Settings Following Weaker Credit Data

US banks provide an update on the China policy outlook post Friday's new loans/credit update.

Goldman Sachs: "February's new RMB loans, TSF data and M2 all came in below expectations. The sluggish TSF growth despite the strong government bond issuance implied soft credit demand, in particular related to the household sector. The composition of RMB loan data showed low household loan growth on the back of further deterioration of property transactions and low consumer confidence. Corporate medium to long term loan growth remained solid on the other hand, which should be supportive to investment growth. More monetary policy easing is needed - PBOC governor Pan Gongsheng highlighted that there was still room to cut RRR at the "Two Sessions" press conference. We continue to expect the PBOC to cut RRR in Q2 and Q4 (25bp each) and cut policy rate in Q3 (by 10bp)."

J.P. Morgan: "The breakdown of February credit suggests that credit support is focused on manufacturing and government-supported areas, led by MLT corporate loans and government bond. Contraction in household loans (a decline of 487bn yuan in short-term loans and a decline of 104bn in MLT loan to households) pointed at continuous weakness in the housing market and cautiousness in household borrowing. Interestingly, household deposits increased by 5.73 trillion yuan in the first two months of this year, smaller than the 6.99 trillion increase in the first two months of 2023. The moderation in household deposit increase and less spending in home purchase restriction may be used to support consumption or investment in other financial assets.

The PBOC maintained the one-year MLF rate unchanged at 2.5%, in line with market expectations. The amount of MLF liquidity injection is 387 billion yuan, smaller than expired MLF of 481 billion yuan. This is the first month of net liquidity withdrawal in MLF operation since November 2022, after the cumulative 2,892 billion yuan net liquidity injection via MLF in the past 15 months.

We had penciled in a rate cut of 10bps in March, but have postponed into 2Q for two reasons. First, February CPI inflation rose to 0.7%oya (vs. -0.8%oya in January) on a 0.8%m/m sa increase, and core CPI inflation jumped to 1.2%oya (vs. 0.4%oya in January, the highest reading in the past two years). Although the inflation pick-up is largely driven by LNY seasonality, we think it is comforting for the PBOC as it has continued to downplay the deflation risk concern."