China's blistering credit growth loses steam

Credit growth decelerated for the first time since 2008 and should pile on more pressure to the economy.

Despite economic stimulus efforts and due to resurging economic fears, Fitch said its adjusted Total Societal Financing (TSF) measure is on pace to reach CNY16.5trn-CNY17trn in 2012, down from 2011's CNY17.5trn.

"Absent stimulus, credit growth could be even lower," said Fitch.

"Broad credit growth began to moderate in the second half of 2011, and this slowdown has accelerated in 2012," said Charlene Chu, Head of Chinese banks' ratings at Fitch. "Weakening demand for credit as well as resource contraints from thinning bank liquidity have been weighing on bank lending."

Fitch noted that offshore credit has been particularly sluggish amid renewed China hard landing fears and European banks' deleveraging. Domestic nonbank credit has been more resilient, but is expected to come in below 2011 levels.

The slowdown in credit is being met with an equivalent moderation in GDP growth, suggesting that the economic return on credit remains weak. Fitch estimates that in 2012 each CNY1 in new financing will yield only CNY0.39 in new GDP versus CNY0.73 pre-crisis.

"Since the global crisis, the Chinese economy has become increasingly reliant on abundant, cheap financing to propel GDP growth. Therefore, it is not a surprise to see GDP growth slowing in tandem with broad credit growth," Chu said. "By the same token, it will be difficult to see a significant turnaround in economic growth absent a rebound in credit."