BEIJING China's banks unexpectedly extended less credit in March than in the previous month as the government tries to contain the risks from an explosive build-up in debt and an overheating housing market.
But aggregate financing, which includes bank loans as well as off-balance sheet lending, surged in March and was a record in the first quarter, raising doubts about the effectiveness of official efforts so far to clamp down on risks in the financial system.
A surge in household lending in March also added to worries about whether authorities will be able to get the frenzied property market under control, even as cities roll out increasingly stringent curbs on home buying.
The central bank has raised interest rates on money market instruments and special short- and mid-term loans several times in recent months, most recently in mid-March, to contain debt risks and discourage speculation, though it is treading cautiously to avoid hurting economic growth.
Outstanding bank loans grew at the slowest pace since July 2002 in March at 12.4 percent, while M2 money supply growth hit a more than 6-month low, reflecting the moderately tighter policy stance by the People's Bank of China (PBOC).
On the surface, the level of March new loans fell, also suggesting authorities are making some headway in weaning borrowers off endless cheap credit and coaxing debt-laden companies to deleverage.
China's banks made 1.02 trillion yuan ($148.15 billion) in new loans in March, data showed on Friday, down from 1.17 trillion yuan in February and well below the 1.25 trillion yuan that analysts had predicted in a Reuters poll.
However, banks still extended the third highest loans on record for a single quarter, totalling 4.22 trillion yuan in January-March.
The first quarter is usually the busiest of the year for Chinese banks, when they have a fresh annual quota and look to lock up key clients.
HOUSEHOLD LENDING SURGES
Loans to households surged to 797.7 billion yuan in March, according to Reuters calculations using PBOC data, accounting for 78 percent of all new loans in the month.
That was much higher than either January or February and even the 50 percent of new loans in 2016.
The rise likely was due to a surge in short-term lending to households, as individuals may be turning to alternative types of loans as banks tighten rules on traditional mortgages, said Wendy Chen, an economist at Nomura in Shanghai.
"We think (the increase in short-term loans) is possibly due to attempts to circumvent strict regulations on mortgages," said Chen.
"The high loans to households reflect that property sales are still very hot, and likely shifting from top tier cities to more third or fourth tier cities."
Indeed, as China's housing market continues to overheat, more cities have implemented strict home purchase rules, with some even restricting homeowners from "flipping" or re-selling properties they have held for only a brief time. [nL3N1HJ3LD]
MONEY, MONEY, MONEY
China's total social financing (TSF), a broad measure of credit and liquidity in the economy, rocketed to 2.12 trillion yuan in March from 1.15 trillion yuan in February.
For the first quarter, TSF reached a record 6.93 trillion yuan -- roughly equivalent to the size of Mexico's economy -- and well above last year's first quarter total.
For analysts, that suggests a surge in off-balance sheet lending, likely in the less regulated shadow banking system, despite repeated attempts by authorities to target riskier lending in past years.
Loans to companies totalled 368.6 billion yuan in March, less than half the amount of household lending, PBOC data showed.
That could be an ominous signal for the economy, unless firms were finding other sources of funding.
Nomura's Chen said that the spike in non-bank credit growth in March may have been due to corporate borrowers turning to alternative funding channels as high demand for household loans crowded them out from traditional bank loans.
But she noted that TSF is notoriously volatile and may not continue to be this high.
"We don't think the strength in shadow banking activity will continue," Chen said, adding that regulators are expected to continue slowly clamping down on the sector.
Indeed, the PBOC's quarterly inspection of banks' books included off-balance sheet wealth management products for the first time in March to give authorities a better sense of potential risks to the financial system.[nL3N1H61WC]
While total financing soared, broad M2 money supply (M2) in March grew 10.6 percent from a year earlier, the slowest monthly growth since July and missing forecasts for an 11.1 percent expansion.
Along with gingerly bumping up some interest rates, the PBOC withdrew 705 billion yuan from the financial system through its open market operations in the first 12 weeks of this year, a 1.1 trillion yuan negative swing from a year ago, ING estimates.
Still, analysts do not expect a full-blown policy rate increase this year, which could risk a knock to economic growth ahead of a key party meeting in the autumn when a new generation of leaders will be picked.
The central government has made containing financial risks a top priority this year, calling for vigilance against asset bubbles and urging companies to reduce leverage.
But it has still targeted economic growth of around 6.5 percent this year, which will require copious amounts of new credit.
Most of China's "Big Five" banks reported last month that bad loan ratios were stabilising, likely giving policymakers more confidence that risks from bank lending are under control.
But many analysts believe sour loans are far higher than banks admit, and some China watchers warn a debt crisis may be inevitable if loan and money supply growth continues to sharply outpace the rate of economic expansion.
($1 = 6.8851 Chinese yuan renminbi)
($1 = 6.8860 Chinese yuan renminbi)
(Reporting by Elias Glenn and Cheng Fang; Editing by Richard Borsuk and Kim Coghill)