By Judy Hua and Kevin Yao

BEIJING (Reuters) – China’s new bank loans picked up in May from the previous month, as the central bank kept policy accommodative to support the economy, but signs of slowing momentum have raised expectations that more stimulus may be needed to sustain the recovery.

The weaker-than-expected credit data could strengthen the case for policymakers to roll out more support steps, including a cut in the benchmark lending rate this month, analysts said, amid deflationary risks and mounting local government debt.

New bank lending rose to 1.36 trillion yuan ($190.18 billion) in May, data from the People’s Bank of China (PBOC) showed on Tuesday, up from April but missed analysts’ estimates.

Economists polled by Reuters had expected new yuan loans would jump to 1.6 trillion yuan last month, versus 718.8 billion yuan in April and against 1.89 trillion yuan a year earlier.

“The credit growth is weak, which is not surprising as other economic indicators such as PMI and exports also sent consistent signals,” Zhiwei Zhang, chief economist at Pinpoint Asset Management, said in a note.

“This explains why the PBOC cut the reverse repo rate this morning. It is a small step in the right direction. I expect more policy actions to follow in coming weeks.”

China’s central bank cut short-term borrowing costs on Tuesday to help restore confidence, signalling possible easing for longer-term rates.

Capital Economics analysts said a sharp slowdown in credit growth is particularly worrying. Outstanding yuan loans in May grew 11.4% on year compared with 11.8% growth the previous month. Analysts had forecast 11.6% growth.

“This is concerning given that credit growth is one of the most reliable leading indicators of China’s economic cycle. Unless the slowdown in lending is arrested soon, it risks derailing the reopening recovery,” they said in a note.

The world’s second-largest economy grew at a faster-than-expected clip in the first quarter, rebounding from three years of pandemic restrictions, but the recovery has been patchy with the services sector outperforming manufacturing and exports.

Household loans including mortgages were up 367.2 billion yuan in May, versus a contraction of 241.1 billion yuan in April. Corporate loans rose to 855.8 billion yuan in May from 683.9 billion yuan in April, central bank data showed.

Recent data has shown China’s recovery is stalling as global demand falters, raising expectations that the authorities need to spur growth and keep a lid on unemployment.

MODEST EASING STEPS SEEN IN PIPELINE

The PBOC will enhance “counter-cyclical” policy adjustments to fully support the real economy and policy tools will be used to lower funding costs, central bank governor Yi Gang said in a meeting in Shanghai last week, according to a statement.

“We believe these comments suggest that Beijing has now become seriously concerned over the potential for a double dip, and the PBOC may respond by stepping up stimulus measures in the near term,” analysts at Nomura said in a note.

Some analysts expect the PBOC to cut the benchmark lending rate, or loan prime rate (LPR), this month, citing recent deposit rate cuts by Chinese banks and an expected pause in the U.S. Federal Reserve’s rate hikes.

The central bank, which cut banks’ reserve requirement ratio – the amount of cash that banks must hold as reserves – in March, has kept the LPR unchanged since September.

China’s top economic planner released on Tuesday a raft of steps to lower business costs, including exempting and reducing value-added tax for small firms and lowering lending rates.

Broad M2 money supply in May grew 11.6% on year, below 12.1% forecast in a Reuters poll. M2 grew 12.4% in April.

Growth of outstanding total social financing (TSF), a broad measure of credit and liquidity in the economy, slowed to 9.5% in May from 10% in April.

TSF includes off-balance sheet forms of financing that exist outside the conventional bank lending system, such as initial public offerings, loans from trust companies and bond sales.

In May, TSF rose to 1.56 trillion yuan from 1.22 trillion yuan in April. Analysts had forecast TSF of 2 trillion yuan.

(Reporting by Qiaoyi Li, Judy Hua and Kevin Yao; Editing by Jacqueline Wong)

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