China's TSF growth continued to slow in June, while the household sector remained in deleveraging

Overview

This report focuses on China's financial data for June 2026. Its core conclusion is that deleveraging is still ongoing, while TSF and loan expansion continued to slow, and although new household lending showed some seasonal recovery, it remained weak year over year. The report interprets this shift as a continuation of policymakers' emphasis on credit “quality over quantity,” rather than simply a negative signal of credit contraction.

Core views

Morgan Stanley believes that TSF YoY growth slowed to 7.4% in June and RMB loan growth slowed to 5.3%, reflecting more rational credit behavior after anti-involution policies, reduced window guidance, and the removal of growth targets for inclusive small and micro loans. Household loans recovered after a net decline in May, but still fell by a cumulative Rmb367bn in 1H26, showing that the household sector continues to deleverage. New medium- to long-term corporate loans totaled Rmb5.55tn year to date, down 23% YoY. The report also believes that slower loan growth may benefit loan and financial asset yields, as yields on newly issued corporate loans were about 3% in June and newly issued mortgage rates were about 3.1%.

Analysis framework

The report mainly compares monthly macro-financial indicators across periods and month over month, including TSF, RMB loans, household loans, corporate loans, government bond financing, household and corporate deposits, and M1/M2 growth, and combines policy signals to assess the quality of credit expansion, financial system yields, and medium-term sustainability.

Methodology notes

• Macro-financial IndicatorsTotal Social Financing

  TSF growth and structure

  Uses total TSF and components such as RMB loans, government bonds, and corporate bonds to assess the strength of credit expansion and its main drivers.

• Bank Credit AnalysisLoan Growth and Deleveraging

  Loan growth and household deleveraging

  Identifies changes in financing demand from households and corporates through new household loans, medium- to long-term corporate loans, and YoY balance growth.

• Money and Deposit AnalysisM1/M2 and Deposit Shift

  Deposit structure shift

  Observes the direction of household savings and corporate deposit allocation through changes in household deposits, non-financial corporate deposits, and demand and time deposits.

• Policy ResearchQuality over Quantity Credit Policy

  Credit quality first

  Links the slowdown in TSF and loans to policy changes such as anti-involution efforts, reduced window guidance, and the removal of quantitative targets for inclusive small and micro loans.

Asset mapping & comparison

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

• Chinese bank stocks

  Affected by loan growth, deposit costs, loan yields, and asset quality expectations

  Strengths

  More rational loan deployment, potentially easing yield pressure at the margin, and improved medium-term stability of the financial system.

  Weaknesses

  Weak demand for household loans and medium- to long-term corporate loans, leaving insufficient momentum for short-term asset expansion.

  Comparison

  The report believes that medium-term TSF growth of around 6% is more sustainable than simply pursuing high credit growth.

  Risks

  If real-economy financing demand continues to weaken or net interest margin pressure rises again, bank earnings improvement may fall short of expectations.

• China non-bank financials and brokers

  Affected by financial system liquidity, risk appetite, and capital market financing activity

  Strengths

  Improved credit structure and policy stability help restore risk appetite.

  Weaknesses

  Slower TSF and corporate financing may restrain some capital market activity.

  Comparison

  The industry coverage table shows that multiple brokers and fintech companies are within Morgan Stanley's China Financials coverage universe.

  Risks

  Market turnover, investment banking business, and fluctuations in policy expectations may affect valuations.

• Government bonds

  Remain an important driver of TSF

  Strengths

  Provide support for credit expansion when loan demand is weak.

  Weaknesses

  The annual quota utilization rate in 1H26 was lower than the same period last year, implying a more back-loaded issuance pace.

  Comparison

  The government bond quota utilization rate in 1H26 was 46%, below 55% in 1H25.

  Risks

  If the subsequent issuance pace or fiscal transmission is weaker than expected, support for TSF may be insufficient.

Key data

• June TSF YoY growth7.4%Below 7.7% in May.
• June RMB loan balance YoY growth5.3%Below 5.5% in May.
• New RMB loans in JuneRmb1.76tnSeasonal quarter-end factors brought some recovery.
• YoY change in new household loans in June-56%Although recovered from the net decline in May, it still fell sharply year over year.
• Cumulative change in household loans in 1H26-Rmb367bnShows that the household sector continues to deleverage.
• Year-to-date new medium- to long-term corporate loansRmb5.55tnDown 23% year over year.
• Government bond annual quota utilization rate46% in 1H26Below 55% in 1H25, but still a key TSF driver.
• Household deposit YoY growth7.1%Growth slowed somewhat.
• Non-financial corporate deposit YoY growth28.6%Still at a high level.
• M1/M2 YoY growth4% / 8%Both slowed in June.
• Yield on newly issued corporate loans~3%Down about 5bps from March 2026.
• New mortgage rate~3.1%Up about 4bps from March 2026.

Impact & implications

The report carries a constructive implication for China's financial system: slower credit expansion may weigh on loan volume growth in the short term, but if accompanied by improved credit allocation quality, less ineffective competition, and a narrower TSF/GDP growth gap, it could improve bank and financial asset yields and enhance the medium-term sustainability of the financial system.

Risks

• The duration of household deleveraging may be longer than expected, dragging on mortgage and consumer credit growth.
• The YoY decline in medium- to long-term corporate loans may reflect insufficient real-economy investment demand.
• Back-loaded government bond issuance makes 2H TSF more dependent on fiscal execution.
• Slower M1 growth may indicate insufficient activation of corporate demand deposits.
• Improvement in loan yields may still be offset by competition, deposit costs, or policy rate changes.

What to watch

• Whether TSF growth in coming months continues to move toward the medium-term sustainable level of around 6%.
• Whether new household loans shift from seasonal recovery to trend improvement.
• Whether the YoY decline in medium- to long-term corporate loans narrows.
• The pace of government bond issuance and fiscal fund usage.
• Shifts among M1, M2, and corporate demand versus time deposits.
• Whether newly issued corporate loan yields and mortgage rates continue to stabilize or rise.