China's Credit Market Just Did Something It Hasn't in 20 Years -- Here's What It Means for Investors

New loan issuance in China just turned negative for the first time in nearly two decades. According to data released Wednesday by the People's Bank of China, yuan-denominated loans fell by 49.9 billion yuan ($7 billion) in Julystunningly missing the median forecast of a 300 billion yuan increase. This isn't just a soft patch. It's the first monthly contraction since July 2005. The drop wasn't due to tighter policy, but net repayments. Borrowershouseholds and businesses alikeare choosing to pay down debt instead of taking on more, suggesting confidence in future growth is weakening. Government stimulus so far hasn't been enough to reverse that mindset.

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Behind the headline number is a deeper chill. Short-term consumer credit is collapsing, with households repaying a net 383 billion yuan of short-term loans in the first seven monthssomething we haven't seen since records began in 2009. Medium- and long-term loans, usually more stable, also took a hit in July. Even corporate borrowing turned negative for the first time since 2016. On the surface, aggregate financing rose 1.2 trillion yuan, helped by strong government bond issuance. But even that missed expectations. The broader read: demand for credit isn't just weakit's deteriorating, even as nominal GDP growth hits its lowest post-pandemic level since data collection began in 1993.

Policymakers appear cautious, but cracks are widening. Beijing just announced interest subsidies on select consumer loans to nudge borrowers back into action. Still, analysts expect real monetary easing won't kick in until Q4possibly more rate cuts or lower reserve requirements. Until then, the economy looks stuck in a loop of deflation and deleveraging. That's not a great setup for risk assets tied to Chinese consumers. Investors in China-exposed names like Tesla (NASDAQ:TSLA) might want to brace for weaker tailwinds from the mainland, at least for now.

This article first appeared on GuruFocus.

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