China (Money supply data,May 2017):Diverging further

May money supply data showed further divergence between credit support for thereal economy, and for the financial system. New bank lending came in marginallyabove expectation at RMB1110bn for the month. In year-over-year terms, thistranslates into a 12.9% loan growth, which points to strong credit support for thereal economy. Lending to both households and the corporate sector (particularlyin the form of mid-long term lending) was robust. Meanwhile, the contraction in thecalled ‘shadow banking system’ intensified in response to tighter regulations.

    According to the PBoC, banks’ reduction in securities investment shaved 1ppt offM2 growth, which this month fell to a record low of 9.6% y-o-y. Furthermore, M2held by the financial sector grew only 0.7%, whereas M2 held by the non-financialsector (mostly in the form of corporate deposits) rose 10.5% y-o-y. As financial deleveragingpolicies continue, this divergence will likely persist and M2 growthcould continue to undershoot in the coming months. Meanwhile, policies areexpected to remain supportive for lending to the real economy in order to sustainthe growth recovery and the PBoC will also remain active in managing interbankliquidity.