M2 growth decelerated to 10.6% YoY in March from 11.1% in February, lower than the market consensus of 11.1% YoY. M2 growth decelerated in March on slower expansion of banks’ domestic assets, including bank loans and bonds. On the other hand, fiscal deposits declined by Rmb767bn in March, which should have given M2 growth a sizeable boost of around 0.5ppt. Meanwhile, M1 growth moderated to 18.8% YoY in March from 21.4% YoY last month, partially driven by slower property transaction value growth and a moderated pace of local government bond swaps. The sequential growth of M1 also slowed to 7.0% MoM SAAR in March.

The issuance of new RMB loans declined to Rmb1.02trn in March from Rmb1.17trn in February, lower than Rmb1.37trn last March and our forecast of Rmb1.4trn. The growth of RMB loan stock also moderated to 12.4% YoY in March from 13.0% YoY in February. New RMB loan issuance totaled Rmb4.2trn in 1Q17, lower than Rmb4.6trn for 1Q16. In March, new medium-/long-term household loans increased to Rmb450bn from Rmb380bn in February, yet to reflect the potential impact of the new round of property tightening in March. New medium-/long-term corporate loans issuance declined to Rmb548bn in March from Rmb602bn in February. Meanwhile, new short-term corporate loan issuance declined to Rmb192bn from Rmb339bn. On the other hand, net outstanding bill financing decreased notably by Rmb386bn in March, following the decline of Rmb242bn in February, reflecting the combined effect of credit rationing and buoyant loan demand. It is also worth noting that FX loans expanded by another US$6.5bn following the increase of US$20bn in March, indicating stabilization of the sentiment towards RMB depreciation pressure.

Total social financing (TSF) increased by Rmb2.12trn in March, higher than Rmb1.15trn in February 2017 but lower than Rmb2.39trn in March 2016. TSF increased by Rmb6.93trn in 1Q17, higher than Rmb6.7trn last year. In March, off-balance sheet financing recovered moderately, with new entrusted loans and trust loans increasing to Rmb204bn and Rmb311bn from Rmb117bn and Rmb106bn, respectively. Meanwhile, new banker’s acceptance bill issuance increased to Rmb239bn from -Rmb172bn in February. Net corporate bond financing (barely) turned positive to Rmb22bn from -Rmb107bn, while new equity issuances climbed to Rmb81bn from Rmb57bn.

Monetary conditions may have tightened more visibly in March.

Adjusted TSF growth decelerated notably to 15.6% YoY from 16.4% YoY in February (Adjusted TSF = TSF + local & government bonds): This more comprehensive measure of the speed for credit expansion decelerated notably to 15.6% YoY and 9.9% MoM SAAR in March, from 16.4% YoY and 12.3% MoM SAAR previously. Apart from slower new loan issuance, local government bond and sovereign bond net issuance have also declined visibly in March compared with last year -- net issuance of the two combined came in at around Rmb400bn in March 2017, compared with >Rmb800bn last March.

Money market rates also climbed higher: The weighted average interbank offered rate and pledged repo rate edged up by 16bp and 23bp to 2.62% and 2.84%, respectively, in March.

The tightening of financial conditions in March was likely driven by the quarter-end MPA, but it may have also resulted from a more prudent monetary policy stance and further policy efforts towards financial deleveraging. Apart from raising the reverse repo rates by 10bp in March, the PBOC has also stepped up the efforts towards promoting financial deleveraging, evident in the more comprehensive MPA guidelines. In the meantime, the CBRC has also issued stricter regulations towards interbank transactions and off-balance-sheet financing. We would continue to closely monitor the change in adjusted TSF growth and interbank rates to gauge the (tightening) effect of these new policies, as the execution of the new regulations holds the key to maintaining a stable financial market during the intricate financial deleveraging process. However, we do not expect prolonged and excessive tightening of financial conditions in the near future, as CPI inflation is expected to remain low and the regulators have vowed to maintain financial market stability throughout the financial deleveraging process.