China’s M2 money supply grew by 7.9% in May compared to last year, a bit lower than the expected 8.1%. The increase in April was 8.0%. In May, new yuan loans reached ¥620.0 billion, which was less than the forecasted ¥850.0 billion and a drop from ¥280.0 billion in the previous month.

Tapering Off In Monetary Momentum

The drop in new bank loans comes after a strong increase in the first quarter, driven by government stimulus due to worries about a potential trade war with the U.S. These new numbers indicate a slowdown in monetary momentum. While many had suspected this, they lacked solid data until now. The slight miss in M2 growth alongside a bigger shortfall in new yuan loans clearly shows that credit expansion is easing after policymakers initially ramped up support earlier in the year. The rapid lending in the first quarter was more about managing external pressure than consistent growth. The ¥620.0 billion lent in May shows that the willingness to borrow is cooling off. Although it’s still an increase from the prior month, it’s significantly less than what was expected. While one might think this could be seasonal, considering the post-stimulus pullback, stricter bank controls, and concerns over asset quality, it looks more like a careful adjustment. We believe that this drop in liquidity and slowing credit growth could impact short-term market sentiment on rates and volatility. Traders focusing on rate-sensitive investments may start to lower their expectations for aggressive easing. The muted credit growth often leads to decreased real activity, which usually calls for some monetary support. However, the slow rise in M2 suggests that authorities are not yet flooding the system with money.

Potential For Additional Loosening Tools

This slowdown, particularly amid rising geopolitical risks, presents a challenge. Previous interventions were laid out in advance, likely to create a buffer before trade tensions escalate further. But the weak loan figures in May indicate tighter financial conditions than intended. This could lead to speculation about additional measures for easing, such as cutting reserve requirements or providing more targeted guidance. For implied volatility in Asian FX and interest rate curves, this softer data can introduce temporary uncertainty. We’ve seen before that small credit contractions lead to quick market reactions before the calm returns. Recently, traders are reassessing much faster, often taking just a few sessions rather than weeks. Thus, positioning around these trends requires quicker responses than in the past. In summary, liquidity support seems to be lagging behind market expectations, causing an imbalance—especially in swaps and structured carry trade products. We should closely monitor further actions by the People’s Bank of China in open market channels. Any signs of increased operations or adjustments to repo rates would likely provide more clarity. It’s important to recognize that this May data, often considered backward-looking, might actually be one of the most forward-looking releases. Growth predictions based on stimulus will only hold if the necessary funds are available and circulating. We’re observing the gap between policy goals and real credit delivery, and how this gap can influence risk perceptions in funding markets. Create your live VT Markets account and start trading now.

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