Insights 
VT 
China’s M2 money supply in May increased by 7.9% year-on-year, slightly below the anticipated 8.1%. The previous month recorded an 8.0% rise.
New yuan loans for May were ¥620.0 billion, falling short of the projected ¥850.0 billion. This figure decreased from a prior ¥280.0 billion.
Tapering Off In Monetary Momentum
The reduction in new bank loans occurred after a surge in the first quarter. This surge was mainly influenced by policymakers’ stimulus measures due to concerns over a potential trade war with the US.
These newly released figures suggest a tapering off in monetary momentum, a development many had begun to suspect but few had definitive data to support—until now. The modest miss in the M2 growth, alongside a more marked shortfall in new yuan loans, serves as a concrete signal that credit expansion is slowing after policymakers frontloaded support earlier in the year. That early burst, as seen in the first quarter’s lending push, seems to have been less about steady growth and more about buying time amid external pressure.
Looking at the ¥620.0 billion lent out in May, it’s clear that lending appetite has cooled. This monthly figure is less than half of what some had expected, and although it still represents an increase on the previous month, the scale of the underperformance removes any notion of a directional upswing. One might be tempted to attribute this to seasonal variations, but viewed in context—the post-stimulus pullback, tightened bank controls, and fears around asset quality—it reads more like a cautious recalibration.
From our vantage point, this decline in liquidity and slowing credit creation is likely to influence short-term sentiment in rate and volatility markets. Traders focused on rate-sensitive instruments may find that medium-dated contracts start pricing in lower expectations for aggressive easing. There’s good cause for that shift. The subdued credit growth can feed into lower real activity, and in response, we would typically expect some form of monetary support. However, the muted increase in M2 tells us that authorities are not flooding the system, at least not yet.
Potential For Additional Loosening Tools
This deceleration, especially in the face of heightened geopolitical risk, poses a dilemma. On one hand, we have seen that prior interventions were front-loaded—possibly to establish a buffer before trade-related tension escalates further. On the other, the tepid loan volumes in May point to tighter financial conditions than perhaps intended. That could stir new speculation about additional loosening tools being brought back into the equation—whether via reserve requirement cuts or more pointed window guidance.
For implied volatility levels on Asian FX and rates curves, this softer print tends to inject short-lived uncertainty. We have already observed previous episodes where mild credit contractions spurred near-term “carry unwind” reactions before calmer hands stepped back in. What we’ve learnt here is that response time has shortened recently—it no longer takes several weeks for traders to reassess, but merely a few sessions. So, positioning around these themes requires sharper reaction than in previous cycles.
The overall takeaway for near-term action: liquidity support appears to be pacing behind market expectations, and that discrepancy creates imbalance—especially in swaps and structured carry trade products. From our side, active monitoring of further People’s Bank of China operations in open market channels is warranted. Any sign of stepped-up operations or repo rate fine-tuning would likely provide more clarity.
It’s hard to ignore the fact that this May data set, though often seen as backward-looking, is arguably the most forward-indicating of all the recent releases. After all, growth projections rooted in stimulus only hold if the money required to fund that recovery is actually available and flowing. Here, we’re witnessing the gap between policy ambition and on-the-ground credit delivery, and how that gap can shift perceived risk adjustment in funding markets.
