China Financials Further moderation in TSF growth good for ...-110333941

M UpdateChina Financials | Asia PacificFurther moderation in TSF growth good for risk control and loan yield stabilizationMorgan Stanley Asia Limited+Richard Xu, CFAEquity Analyst Richard.Xu@morganstanley.com +852 2848-6729 Beryl YangResearch Associate Beryl.Yang@morganstanley.com +852 3963-2224 Chiyao HuangEquity Analyst Chiyao.Huang@morganstanley.com +852 3963-4624 China FinancialsAsia PacificIndustry ViewAttractive Related reports: China Financials: July credit data continue to show impact of reduced window guidance (13 Aug 2024) China Financials: Zhejiang trip takeaways: industrial strength remains and fiscal support to kick in in 4Q (9 Sep 2024) Headline TSF moderated to ~8% yoy in August, with more rational loan extension, which should lead to stabilizing yields. Government bond issuance likely to act as main support for investment and consumption for 2H24.TSF growth moderated towards 8% YoY with further moderation expected – good for long-term financial stability: Headline TSF rose 8.1% YoY in August, and RMB loan growth moderated to the same level. We believe this resulted from: 1) continued efforts to reduce self-circulating loans; and 2) rationalization of loan growth, especially as banks prioritize risk containment and rational loan pricing amid reduced window guidance. Government bonds were strong following slow issuance in 1H24, in-line with our post-Hangzhou trip view that government bonds will be used to support investment and consumption in 2H24. We continue to expect TSF growth to end up at ~8% for 2024, potentially falling below 8%. We believe earlier-than-expected rationalization would be better for the long-term sustainability of the financial system. We see credit growth slowing to ~7% in 2025, closing the gap between credit supply and demand, and supporting loan yields with more market-oriented loan pricing by banks.More rational loan growth as focus gradually shifts away from aggressive investment and capacity expansion: Long-term corporate loans still weak in August, likely due to more rational investments following policies on capacity control and Fair Competition Rules. PBOC also stressed the need to balance consumption and investments, signaling a shift in focus from capacity expansion to boosting consumption. Nevertheless, we think consumption credit demand will hinge on household confidence, evidenced in still weak short-term HH loans. Positively, mortgages are gradually stabilizing with a slower decline YTD, likely due to: 1) lower early repayments vs. 2023; and 2) some demand recovery amid lower mortgage rates, per our checks with banks. On the other hand, we think there has been some back and forth on window guidance, which might drive up bills to support credit, although more mildly than before. M1 growth down further due to reclassification of deposits, with continued efforts to squeeze out self-circulating loans: M1 and corporate deposit growth further moderated to -7.3% and -3.9% YoY, respec