China bank lending up sharply in June, helped by central bank support

China's banks made 1.28 trillion yuan ($206.18 billion) in new loans in June, handily topping market expectations, while broad money supply growth quickened last month, thanks to the central bank loosening policy to support the slowing economy.

In June, the central bank cut lending rates for the fourth time in seven months, and lowered the amount of cash some banks must keep as reserves.

The June loan data was announced a day before China unveils its second-quarter growth figure. Economists expect a six-year low of 6.9%, and they anticipate further policy easing moves in its wake.

China's central bank will fine-tune its policy to provide more liquidity for the economy, a senior bank official said on Tuesday, as recent easing steps help lower funding costs for companies.

The June lending and money supply figures "are higher than market expectations, indicating recent government measures have gained traction to lift loan demands in the real economy," said Li Huiyong, an economist at Shenyin & Wanguo Securities in Shanghai.

"They also mean China's economy may stabilise in the coming months. Still we believe the monetary easing will continue."

Banks made a total of 6.56 trillion yuan in new loans in the first six months of 2015, said the People's Bank of China (PBOC).

June's 1.28 trillion yuan of new yuan loans was well above the 1.05 trillion yuan predicted in a Reuters poll and May's total of 900.8 billion yuan.

The PBOC said the broad M2 money supply (M2) grew at 11.8%, beating expectations of 11%.

Outstanding yuan loans grew at 13.4% by month-end, the central bank said, missing expectations of 14%.

ANOTHER DECLINE IN RESERVES

Total social financing (TSF), a broader measure of overall liquidity in the economy, was 1.86 trillion yuan in June, compared with 1.22 trillion yuan in May.

New yuan loans accounted for 74% of the TSF in the first half of 2015, corporate bonds 11%, entrusted loans 6%, and stock issuance nearly 5%, the data showed.

Meanwhile, China's foreign exchange reserves, the world's largest, fell by $40 billion in the second quarter to $3.69 trillion - the fourth consecutive quarter of decline amid signs of capital outflows, PBOC data showed.

The PBOC faces an uphill battle to channel money into the real economy even as the banking system is flush with cash, which has pushed down money market rates and stoked concerns about stock market bubbles.

The State Council, China's cabinet, decided to scrap the country's longstanding loan-to-deposit ratio requirement in late June, the latest measure to reform the country's commercial banking sector and get more lending into a slowing economy.

The rapid decline of China's previously-booming stock market, which by the end of last week had fallen around 30% from a mid-June peak, has been a major headache for China's top leaders, who were already struggling to avert a sharper economic slowdown.

The market rout "offers a good opportunity for the PBOC to cut RRR (reserve requirements) soon to help stabilise the market while encouraging banks to lend to the real economy," Li-Gang Liu, China economist at ANZ, said in a note.

ANZ said it expected another 25-basis-point interest rate cut in the third quarter and another 50-bp cut in RRR, possibly in the fourth quarter.

($1 = 6.2080 Chinese yuan)