Insights 
VT 
New bank loans in China reached 620 billion yuan in May, falling short of the forecasted 850 billion. This comes after experiencing a nine-month low in April.
Year-on-year loan growth slowed to a record low of 7.1%, decreasing from 7.2% in April. While household loans saw a small increase of 54 billion yuan in May, corporate loan demand continued to weaken.
broad M2 money supply
The broad M2 money supply rose 7.9% year-on-year, below the expected 8.1% and a decrease from April’s 8.0%. Total social financing (TSF) growth remained stable at 8.7% due to increased government bond issuance.
Persisting deflation pressures and high real borrowing costs appear to be moderating private credit demand, even with modest central bank easing measures. Analysts from Capital Economics expect additional rate cuts of up to 40 basis points within the year.
The People’s Bank of China (PBOC) planned to inject funds through outright reverse repos for the second time in the month.
This article outlines a noticeable cooling in credit growth across China, casting light on the diminished appetite for borrowing despite modest action from the central bank. The numbers are telling. There was a weaker-than-expected uptick in new loans during May—with just 620 billion yuan extended, well below the projection of 850 billion. Putting that into perspective, it signals that banks are lending less, but more importantly, it suggests that businesses and households have little enthusiasm to borrow, even when credit is available.
The situation continued to reveal itself in the sluggish year-on-year loan growth, which dropped to a low of 7.1%, down further from April’s already-low 7.2%. Loans to households managed a marginal increase—only 54 billion yuan—while companies are showing clear signs of hesitation.
One key reason behind this hesitancy is the high cost of borrowing after adjusting for inflation, which remains weighed down by deflationary forces. Essentially, even if the nominal interest rates are low, real rates stay elevated when prices are flat or falling. That discourages expansion through debt. From a monetary perspective, the broader money supply, M2, grew less than anticipated, and the figure receded from the previous month. This is a reflection of the same phenomenon—money isn’t moving as much through the economy.
Even though total social financing growth held steady, that wasn’t driven by an upturn in credit appetite among firms or households, but rather by government bond activity. In short, the state continues to borrow and spend even as the private sector retreats. All of this has set the backdrop for further policy moves.
implications of cooling credit
Zichun Huang from Capital Economics has echoed expectations for further easing, forecasting up to 40 basis points of rate reductions later this year. In response, the central bank has already stepped in again using reverse repos, which help add liquidity to the market. This line of action reveals a willingness to increase short-term money supply in an attempt to jolt more lending.
We are keeping close track of disinflation risks, M2 trend shifts, and policy measures such as open market operations, as these are generating very direct implications for rate-sensitive strategies. It becomes more difficult to position for growth when loan growth slows in tandem with private demand. Assuming the central bank follows through with rate cuts and liquidity injections, we may see further yield compression.
Funding rates could remain anchored or even drift lower, pulling implied rates with them. For us, this opens up a window. Stronger odds of layered rate adjustments add weight to directional bias in short-term interest rate markets. Term structure shifts will likely continue to reflect this cooling credit cycle, so when structuring exposures, it makes sense to favour curve steepening trades. Positioning for lower front-end rates while remaining neutral further out may prove beneficial.
With new lending below expectations, particularly after an already poor month in April, current patterns are likely not an anomaly but part of a broader cooling phase. Monitoring reverse repo activity, pace of government bond issuance, and shifts in MLF activity from the PBOC will help refine rate path expectations. The way spreads move between instruments tied to government policy, versus those tied to corporate credit, may present entry points during this quiet issuance season.
We also see less noise in the market compared to higher volatility months. That makes short-term repricing events more reflective of fundamental credit data, rather than uncertainty spikes. So it pays to weigh new loan and M2 figures side-by-side with inflation data and repo rates over the coming sessions. Taking a patient view backed by balance sheet conditions may offer more stable returns in this phase.
