By Lusha Zhang and Kevin Yao
BEIJING (Reuters) - Chinese banks doled out more loans in May to support the slowing economy hurt by a trade war with the United States, with further policy easing likely even amid accelerating consumer inflation.
Markets are keen to see if government efforts to spur lending, especially to smaller business, will help sustain credit growth in the wake of a sharp escalation in the Sino-U.S. trade war that could put a brake on economic growth this year.
"May credit data showed some improvement due to policy support," said Luo Yunfeng, an analyst at Merchants Securities in Beijing. "Further policy easing may be needed if trade frictions between China and the United States have a big impact on the economy."
Chinese banks extended 1.18 trillion yuan ($170.7 billion) in net new yuan loans in May, up from 1.02 trillion yuan in April, People's Bank of China (PBOC) data showed on Wednesday, but less than the 1.225 trillion yuan analysts expected.
Growth of outstanding total social financing (TSF), a broad measure of credit and liquidity in the economy, quickened to 10.6% in May from a year earlier from 10.4% 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 1.4 trillion yuan from 1.36 trillion yuan in April.
Broad M2 money supply in May grew 8.5% from a year earlier, below estimates of 8.6% by analysts polled by Reuters, and unchanged from April's pace.
Outstanding yuan loans grew 13.4% from a year earlier. Analysts had expected 13.5%, unchanged from April's pace.
"Credit growth remained broadly stable in May," Capital Economics said in a note. "Policy easing has not yet been effective in generating a sustained pick-up in credit growth and is one of the reasons why we don't expect a strong recovery in economic growth in the coming months."
ROOM FOR EASING
Central bank chief Yi Gang said last week that there was "tremendous" room to make policy adjustments if the China-U.S. trade war worsens.
Further cuts in banks' reserve requirements are expected this year, especially after an escalation in the U.S.-China trade war last month, when both sides hiked tariffs on each other's goods and Washington threatened more.
The central bank remains reluctant to cut benchmark interest rates, barring any sharp deterioration in the economy, analysts say.
The PBOC stepped up efforts to increase loan growth and business activity in May, announcing a three-phase cut in regional banks' reserve requirements to reduce financing costs for small and private companies.
It has now delivered six RRR cuts since early 2018.
But funding costs for companies remain high.
The PBOC said last month it will help reduce borrowing costs for companies, especially small firms, as part of a wider effort to support the world's second-largest economy amid a trade war with the United States.
The weighted average lending rate for companies and home buyers edged up 5 basis points in the first quarter to 5.69%, central bank data showed.
The government has ratcheted up fiscal stimulus to support growth, including fast-tracking infrastructure projects, cutting taxes for companies.
Despite a flurry of growth measures since last year, domestic demand remains sluggish. Factory activity contracted in May, and data on Monday showed imports slumped the most in nearly three years.
China's economic growth in 2019 is on track to slow from a 28-year low of 6.6 percent last year.
China's consumer inflation quickened to 2.7% in May - in line with expectations and hitting a 15-month high, data from the National Bureau of Statistics showed earlier on Wednesday.
That's still lower than the annual official target of around 3%.
Analysts believe the jump in headline inflation, driven by a 7.7% year-on-year increase in the food price index, won't stand in the way of the central bank easing policy further.
Core inflation, that strips out volatile food and energy prices, eased to 1.6% in May from a year earlier, from 1.7% a month earlier.
"Today's inflation numbers are unlikely to impact China's monetary policy stance. But the authorities will maintain a counter-cyclical stance on both the fiscal and monetary fronts amid growth risks from the trade conflict with the U.S.," analysts at ANZ said in a note
"In additional, the dovish shift of other central banks will provide room for the PBOC to ease policy as well."
(Editing by Jacqueline Wong)