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China’s New Loan and Aggregate Financing Plans: Are They Working?

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New loans

According to the PBC (People’s Bank of China), new loans issued by Chinese banks rose to 1.4 trillion yuan ($211.2 billion) in March from 726.6 billion yuan ($112.0 billion) in February 2016. The rise in new loans indicates that the central bank has taken steps to boost growth in the Chinese economy.

In March, M2 money supply rose to 13.4% YoY (year-over-year) from 13.3%. M2 includes not only cash and checking deposits but also savings deposits, money market mutual funds, and other time deposits, which are less liquid and but can be quickly converted into cash or checking deposits.

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China’s aggregate financing rose

Aggregate financing is the broadest measure of credit growth in an economy. It measures liquidity by adding the total funds provided by the financial system to non-financial sectors and households. In March, China’s aggregate financing rose to 2.4 trillion yuan ($361 billion) from 780.2 billion yuan ($120 billion) in February.

Financial reforms

China’s financial system has been under pressure due to the economic slowdown. In 2015, China recorded a growth rate of 6.9%, the lowest seen since 1990. China provided monetary stimulus to revive its stumbling economy. The PBC has already slashed benchmark interest rates six times since November 2014, dropping it down by 165 basis points to 4.4%.

On February 29, 2016, the PBC surprised the market again by lowering the RRR (required rate of return) by 50 basis points to 17%. The PBC said that this was done to maintain adequate liquidity, which has been tightening over the past few months due to a substantial capital outflow from the country. The outlook for the Chinese economy shows signs of stabilization.

Impact on mutual funds

The rise or fall in new yuan loans does not directly impact the overall performance of mutual funds. However, 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 financial sector exposures of 38.7%, 35.8%, and 33.0%, respectively, and may be impacted by the rise in new loans.

These funds invest in companies such as Tencent Holdings Limited (TCEHY), Taiwan Semiconductor Manufacturing Company (TSM), China Mobile (CHL), China Construction Bank (CICHY), and ICBC (IDBCY). For more mutual fund analysis, please visit Market Realist’s Mutual Funds page.

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