According to the PBoC (People’s Bank of China), new loans issued by Chinese banks fell sharply to 597.8 billion yuan, or about $90.7 billion, in December 2015. This was down from 708.9 billion yuan, or about $107.7 billion, in November. The new yuan loans were lower than expected due to weak credit demand and default risk. The PBoC has already slashed its benchmark interest rates six times since November 2014, but this drop in new yuan loans signals that China may have to take more drastic steps to boost its economic growth.
Broad money supply M2 rose 13.3% YoY (year-on-year) in December 2015 but less than the 13.7% YoY growth we saw in November. M2 includes not only cash and checking deposits but also savings deposits, money market mutual funds, and other time deposits, which are less liquid but can be quickly converted into cash or checking deposits.
Aggregate financing is the broadest measure of credit growth in the economy. It measures liquidity by adding total funds provided by the financial system to non-financial sectors and households. China’s aggregate financing soared from 1.02 trillion yuan, or about $152 billion, in November to 1.82 trillion yuan, or about $276.4 billion, in December.
The PBoC has reduced interest rates six times since November 2014 by a total of 165 basis points to 4.35%, and the outlook for the Chinese economy still isn’t very attractive. It’s widely expected that the PBoC may resort to further monetary stimuli in the form of more rate cuts to support the slowing economy.
The rise in new yuan loans does not directly impact the overall performance of the mutual funds. However, with the rise in credit flow in the economy, mutual funds with large exposure to financials sector may benefit. The Shelton Greater China Fund (SGCFX), the AllianzGI China Equity Fund Class A (ALQAX), and the Fidelity Advisor China Region Fund Class A (FHKAX) have weights of 38.7%, 35.8%, and 33.0%, respectively, to the financial sector, and these funds may be favorably impacted by the rise in new loans.
These funds are invested in companies such as Tencent Holdings Limited (TCEHY), Taiwan Semiconductor Manufacturing Company Limited (TSM), China Mobile Limited (CHL), China Construction Bank Corporation (CICHY), and Industrial and Commercial Bank of China (IDBCY).
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