Despite a 15-year low in China's new loans, investors should remain calm.

• The second-largest economy in the world experienced a 88% decline in new loans, with only 260 billion yuan ($36.28 billion) coming in, which was 450 billion yuan short of expectations.
• The crackdown on "self-circulating" practices on loans in the financial system contributed to the decline.

In July, China's new bank loans reached a 15-year low, which some analysts view as a reflection of the economy's continued weakness. However, others believe that investors should not be concerned, as seasonality and regulations may have caused the unexpected slowdown.

The second-largest economy in the world experienced a 88% decline in new loans, with only 260 billion yuan ($36.28 billion) coming in, which was 450 billion yuan short of expectations.

The decline in July loan growth was due to weak credit demand and spending among corporations and households, as stated by Iris Tan, senior equity analyst at Morningstar.

Household short-term loans declined significantly, indicating continued weakness in consumer confidence and spending, while corporate loans expanded at a slower pace, mainly driven by discounted bank notes, according to Tan.

The decline in short-term corporate loans was due to regulatory measures that prevent the "self-circulating" of money in the financial system, according to Tan.

Big enterprises borrow money at low costs and invest it in high-yield structured deposits or deposit agreements, rather than using it for operations or investments.

Jasmine Duan, senior investment strategist at RBC Wealth Management Asia stated that new loans are not being utilized in the real economy but are instead being used for financial arbitrage. As a result, she believes that the People's Bank of China (PBOC) continues to emphasize that we should not focus too much on overall credit loan growth because many of those loans did not go into the real economy in the past.

In a Tuesday note, Nomura stated that there is "no indication" that the regulatory crackdown will end soon, and they anticipate "slow credit growth in the near future, particularly for RMB loans."

Tan advised that the market should not be concerned about the fluctuations in monthly data during July, as it is a typical weak month for credit growth.

Despite a slight decrease from 8.8% in June, the year-to-date bank loan growth rate of 8.7% remains relatively stable compared to 2023.

"In accordance with the government's directive to curb credit expansion, we contend that moderate credit growth will advantage banks by decreasing their equity consumption and minimizing the risks of unreasonable pricing competition for new loan acquisition," she stated.

Despite the positive factors, the Chinese economy remains sluggish, according to RBC's Duan, who stated that households and corporations have a "relatively low" outlook on the economy.

It is difficult to see significant loan growth if the property market does not find a bottom and stabilize, she concluded.