July TSF Growth Was Flat, While Credit Growth Continued Its Rational Decline

Overview

China's total social financing growth remained stable in July, but credit expansion continued to slow. The report interprets this change as a shift in policy stimulus from short-term expansion toward a more sustainable support model: government bond issuance provides the main financing support, while household and corporate loan demand and banks' willingness to lend remain relatively cautious.

Core views

TSF growth remained stable at 7.4% year on year, but RMB loan growth fell to 5.2%, while the household sector continued deleveraging. Government bond financing increased significantly, partly offsetting weaker loans. Morgan Stanley believes that if TSF growth ultimately declines and stabilizes at around 6%, it will help improve loan pricing, financial resource allocation, and financial companies' profitability.

Analysis framework

By comparing July with June and year-to-date figures with the prior-year period for TSF, RMB loans, deposits, and money supply data, the report dissects fund flows among the government, corporates, households, and non-bank financial institutions, and uses this analysis to assess the sustainability of policy support and its impact on financial-sector profitability.

Methodology notes

• Macro Liquidity AnalysisTotal Social Financing and Credit Structure Tracking

  Measures the scale and structure of credit expansion through TSF, RMB loans, government bond financing, and deposit flows.

  The report focuses on whether financing growth is driven by more sustainable government financing and appropriate credit allocation, rather than short-term loan volume targets.

• Industry ViewRelative Industry Rating

  Attractive indicates that the industry coverage universe is attractive relative to the relevant broad market benchmark over the next 12-18 months.

  This is an industry-level assessment and is not equivalent to a buy recommendation for any specific stock.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Chinese Bank Stocks

  Changes in TSF and loan structure directly affect banks' asset expansion, net interest margins, and earnings quality.

  Strengths

  Government bond financing supports aggregate financing; more rational credit allocation helps improve long-term loan pricing and resource allocation.

  Weaknesses

  Declining household loans and weak corporate loans may constrain asset growth amid insufficient short-term credit demand.

  Comparison

  Compared with an expansion model reliant on loan volume targets, TSF growth of around 6% is viewed as more sustainable.

  Risks

  Continued household deleveraging, cautious consumer credit demand, weaker corporate financing demand, and deposit outflows could all weigh on bank operations.

• Chinese Securities Firms and Wealth-Management-Related Financial Stocks

  Rapid growth in deposits at non-bank financial institutions may reflect funds migrating to wealth-management and capital-market products.

  Strengths

  The reallocation of new savings may expand demand for wealth-management and capital-market products.

  Weaknesses

  The persistence of fund flows and their ultimate allocation remain insufficiently verified.

  Comparison

  Deposit growth at non-bank financial institutions is higher than that of traditional bank deposits.

  Risks

  Market volatility, changes in product returns, or regulatory adjustments could reverse the migration of funds.

Key data

• Outstanding TSF Growth YoY7.4%July 2026, unchanged from June.
• New TSF Year to DateRMB22.25 trillionRMB1.74 trillion lower than in the same period last year.
• RMB Loan Growth YoY5.2%Below 5.3% in June.
• Net Change in Household Loans in July-RMB460 billionCumulative decline of RMB827 billion year to date; an increase of RMB681 billion in the same period of 2025.
• Government Bond Financing in JulyRMB1.32 trillionA key source of support for monthly TSF.
• Non-bank Financial Institution Deposit Growth YoY23.6%Indicates that new savings may continue flowing into wealth-management and capital-market products.
• M1 Growth YoY4.0%Remained stable in July.
• M2 Growth YoY7.7%Below 8.0% in June.

Impact & implications

For China's financial sector, more rational credit growth may constrain short-term asset expansion, but, if combined with more sustainable TSF support and less bill-financing-driven loan growth, it could improve bank loan pricing, capital allocation efficiency, and the industry's long-term earnings quality. Deposits migrating to wealth-management and capital-market products may also benefit wealth management and capital-markets-related businesses, but increase the importance of managing traditional deposit stability and funding costs.

Risks

• Continued household deleveraging and persistently weak demand for housing and consumer credit.
• Weak corporate lending and real-economy financing demand, which could undermine financial institutions' asset growth.
• Government bond financing may fail to be effectively and continuously transmitted to the real economy.
• Migration of deposits to wealth-management and capital markets may increase pressure on banks' liability side.
• The report is based on a single month's financial data, and seasonality and short-term policy factors may affect interpretation.

What to watch

• Whether TSF growth gradually converges toward the sustainable range of around 6%.
• Government bond issuance and the extent of its continued support for TSF.
• Monthly changes in short- and medium- to long-term household loans.
• Underlying financing demand in corporate loans after excluding bill financing.
• Deposit reallocation trends among households, corporates, and non-bank financial institutions.
• Changes in M1 and M2 growth and their implications for the liquidity environment.