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China’s New Yuan Loans and Aggregate Financing Rise in November

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Growth in new yuan loans exceeds expectations

According to the People’s Bank of China (or PBoC), new loans issued by Chinese banks rose by 37.9% to 708.9 billion yuan, or $109.8 billion. The rise in new loans was better than expected, as the PBoC slashed interest rates. The government also increased spending to support the slowing real estate market. Most new loans were medium- and long-term, which is important for productive investment.

Broad money supply M2 rose 13.7% year-over-year in November, up from October’s 13.5%. Money supply M2 includes not only cash and checking deposits but also savings deposits, money market mutual funds, and other time deposits. These are less liquid but can be quickly converted into cash or checking deposits.

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China’s aggregate financing surged

Aggregate financing measures the liquidity by adding total funds provided by a financial system to non-financial sectors and households. China’s aggregate financing rose from 476.7 billion yuan in October to 1,020.0 billion yuan in November.

Outlook for 2016

The PBoC has reduced lending interest rates six times since November 2014 by a total of 165 basis points to 4.4%. But still, the outlook for the Chinese economy isn’t very attractive. It’s widely expected that the PBoC may resort to further monetary stimuli in the form of more rate cuts and currency devaluation to support the slowing economy.

Impact on mutual funds

The rise in new yuan loans doesn’t directly impact the overall performance of mutual funds. However, with the rise in credit flow in the economy, mutual funds with large exposures to financials benefit. The AllianzGI China Equity Fund – Class A (ALQAX) and the Fidelity Advisor China Region Fund – Class A (FHKAX) have 35.8% and 33.0% weight, respectively, in the financial sector. These funds tend to be favorably impacted with the rise in new loans.

These funds are invested in companies such as Tencent Holdings (TCEHY), China Mobile (CHL), Taiwan Semiconductor Manufacturing (TSM), China Construction Bank (CICHY), and Industrial and Commercial Bank of China (IDBCY).

For more analysis on mutual funds, please visit Market Realist’s Mutual Funds page.

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