Credit weakened in July, while government financing supported TSF growth

Overview

Bank of America believes that China's July 2026 credit data indicate that domestic economic activity is still slowing. Weak loan demand led to contractions in RMB loans, household loans, and corporate loans; meanwhile, faster government bond issuance supported growth in total social financing, keeping headline data relatively resilient.

Core views

The core conclusion is that private-sector credit expansion has yet to improve: mortgage-related medium- to long-term household loans continued to decline, while medium- to long-term corporate loans also weakened, indicating insufficient real estate stability and capital-expenditure willingness. Government financing and the anticipated acceleration in fiscal spending may cushion the credit downturn, but are unlikely to generate an immediate broad-based recovery in private credit.

Analysis framework

The report assesses the impact of financial conditions, domestic demand, and fiscal financing on credit expansion by combining July monetary and credit data, total social financing components, new household and corporate loans, money supply data, and Bank of America's China Financial Conditions Index.

Methodology notes

• Financial ConditionsBank of America China Financial Conditions Index (FCI)

  An indicator that comprehensively measures the tightness of the financial environment.

  The July FCI rose from a revised 99.2 in June to 99.4, its highest level since July 2024, reflecting a further modest tightening in financial conditions.

• Credit and FinancingTotal Social Financing (TSF)

  A total measure of funding obtained by the real economy from the financial system.

  The report uses total social financing and its components to distinguish support for headline growth from government bond financing from weak private-sector loan demand.

• Investment DemandMedium- to Long-Term Corporate Loans

  A proxy indicator for corporate capital-expenditure demand.

  Medium- to long-term corporate loans declined by RMB 230 billion in July and were used to assess continued weakness in corporate investment activity.

Asset mapping & comparison

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

• China Real Estate

  Medium- to long-term household loans are an important indicator of housing mortgage demand.

  Strengths

  Faster fiscal spending and increased government financing may improve the overall macroeconomic support environment.

  Weaknesses

  Mortgage-related medium- to long-term household loans remained negative, indicating that the housing market has not yet achieved meaningful stabilization.

  Comparison

  Government financing outperformed household and corporate credit, while the recovery in real estate-related private credit lagged significantly.

  Risks

  If home sales, household income expectations, and mortgage demand remain weak, the real estate adjustment may be prolonged.

• China Government Bonds

  Government bond issuance was the main driver of total social financing growth in July.

  Strengths

  Issuance increased by RMB 1.32 trillion and maintained a high year-on-year growth rate, providing a financing foundation for fiscal support.

  Weaknesses

  Growth in government financing cannot fully replace private-sector demand for consumer, housing, and investment credit.

  Comparison

  Government bond financing outperformed RMB loans, household loans, and corporate loans.

  Risks

  If fiscal spending does not effectively translate into real-economy demand, the boost from financing expansion to credit recovery may be limited.

Key data

• RMB Loans-RMB 340 billionNew loans in July, weaker than market expectations for a decline of RMB 100 billion.
• Incremental Total Social FinancingRMB 1.406 trillionDriven by a RMB 1.32 trillion increase in government bond financing, exceeding market expectations.
• Outstanding Loan Growth, YoY5.1%Further declined from 5.2% in June.
• Total Social Financing Growth, YoY7.4%Unchanged from the previous month.
• M1 and M2 Growth, YoY4.0% / 7.7%M1 was unchanged, while M2 weakened slightly from the prior period.
• New Household Loans-RMB 460 billionBoth short- and medium- to long-term loans declined; mortgage-related medium- to long-term loans fell by RMB 120 billion.
• New Corporate Loans-RMB 130 billionMedium- to long-term corporate loans declined by RMB 230 billion.
• Government Bond Issuance Growth, YoY14.1%Government financing maintained rapid growth.

Impact & implications

From a policy perspective, faster fiscal spending may set a floor for fixed-asset investment and credit expansion, reducing the risk of further weakening in aggregate financing. From a market perspective, if government financing continues to substitute for private-sector leveraging, the quality and sustainability of the economic recovery will still depend on whether real estate stabilizes and household borrowing willingness and corporate capital expenditure improve.

Risks

• Failure of the real estate market to stabilize could continue to suppress mortgage and household credit demand.
• Weakening medium- to long-term corporate loans may signal a further slowdown in capital expenditure and private investment.
• If government-led financing cannot stimulate private-sector demand, improvement in headline total social financing may be difficult to translate into a broader economic recovery.
• Further tightening in financial conditions may increase pressure on domestic demand and credit expansion.

What to watch

• The subsequent pace of government bond issuance and fiscal spending.
• Whether medium- to long-term household loans and housing mortgage demand improve.
• Whether medium- to long-term corporate loans can return to positive growth.
• Whether total social financing growth continues to rely primarily on government financing.
• Changes in M1, M2, outstanding loan growth, and financial conditions indicators.