SHANGHAI (Reuters) - Chinese banks extended more loans than expected in September, buoyed by demand from home buyers and companies, even as the government tightened the screws to wean the economy off its years-long addiction to cheap debt.

A China yuan note is seen in this illustration photo May 31, 2017. REUTERS/Thomas White/Illustration

September loan data released on Saturday indicates that China has continued to give significant credit support for its economy ahead of a key Communist Party congress that opens on Oct. 18.

The next day, China releases third-quarter economic growth data. For the April-June quarter, Beijing reported stronger than expected growth of 6.9 percent from a year earlier.

Both bank lending and total social financing, a broad measure of credit and liquidity, look set to hit another record high this year.

People’s Bank of China Governor Zhou Xiaochuan, in a statement posted on its website on Saturday, said the economy this year is stabilizing and growing more strongly, and the momentum may continue in the second half.

In September, banks extended 1.27 trillion yuan ($193.05 billion) in net new yuan loans, central bank data showed. Analysts polled by Reuters had predicted 1.1 trillion yuan, compared with August’s 1.09 trillion yuan.

Household loans, mostly mortgages, rose to 734.9 billion yuan in September from 663.5 billion yuan in August, according to Reuters calculations based on the central bank’s data.

SHORT-TERM LOAN SPIKE SEEN

Household loans accounted for 58 percent of total new loans last month, down from 61 percent in August.

Short-term loans soared in the third quarter, increasing by 1.53 trillion yuan, almost three times higher than in the year-ago period, according to calculations by Wen Bin, an economist at Minsheng Bank in Beijing.

“A part of these funds are flowing illicitly to the property market and stock market,” said Wen.

Corporate loans in September were 463.5 billion yuan, down from 483 billion yuan a month earlier.

Broad M2 money supply (M2) in September grew 9.2 percent from a year earlier, beating forecasts for an 8.9 percent expansion, as August had.

The growth was in part due to a “seasonal increase in credit and fiscal deposits,” said Wen.

China’s central bank has said that the slowing M2 growth could be a “new normal” due to regulators’ stepped-up crackdown on risky shadow lending activities.

Total social financing (TSF), a broad measure of credit and liquidity in the economy, rose to 1.82 trillion yuan in September from 1.48 trillion yuan in August.

Capital Economics had expected TSF to pick up to 2 trillion yuan in September.

WALKING A TIGHTROPE

Chinese authorities are trying to walk a fine line by containing riskier types of financing and slowing an explosive build-up in debt without stunting economic growth.

For the first time this year, banks were required to start reporting off-balance sheet wealth management products to the central bank every quarter to give authorities a better sense of potential risks to the financial system.

But results of their “de-risking” campaign have been mixed.

Regulators appear to have made good inroads into reducing risks in the financial system from interbank and shadow bank lending -- which were arguably China’s most immediate systemic threat -- and they have allowed borrowing costs to creep up.

Lenders have also shifted more credit back onto their books and shed some lower quality assets.

However, credit growth has remained elevated and there is little evidence that companies are using windfall earnings this year to significantly reduce massive debt burdens.

Indeed, consultancy China Beige Book International (CBB) cautioned about the prevailing market view that China’s economic growth has so far been resilient to government policy tightening, arguing that it has yet to really kick in.

“The mistake is that deleveraging hasn’t gotten off the ground,” said CBB, which surveys thousands of firms quarterly. “If 2018 sees actual tightening, it will be far more traumatic to firms than most analysts realise.”

S&P downgraded China’s sovereign rating in September, saying its attempts to reduce debt risks are not working as quickly as expected and credit is still expanding too fast.

The International Monetary Fund warned this year that China’s credit growth was on a “dangerous trajectory” and called for “decisive action”, while the Bank for International Settlements said in late 2016 that excessive debt growth was signalling a banking crisis in the next three years.

REFORM PUSH

The PBOC has been steadily moving to contain financial system risks, while reiterating that it will maintain prudent and neutral monetary policy and continue with interest rate reform.

Governor Zhou, in the statement posted on Saturday, said positive progress has been achieved in economic transformation.

Analysts at Societe General believe the PBOC took pre-emptive action in recent weeks to offset strains from further tightening measures planned for next year.

The PBOC in late September cut the amount of cash that some banks must hold as reserves (RRR) for the first time since February 2016. The move, effective in January, offers an earnings boost to banks if they lend more to struggling smaller firms and the private sector.

Still, SocGen does not expect the reserve cut alone will be enough to offset an expected slowdown in China next year.

China is likely to accelerate its implementation of reforms after a twice-in-a-decade Communist Party Congress, if President Xi Jinping strengthens his power as widely expected, Capital Economics said in a note last week

But, it added, “given Xi’s reluctance to relinquish state control over key parts of the economy, China’s structural problems are likely to remain unresolved.”

Policymakers’ efforts to push debt-to-equity swaps, securitise bad loans and increase financial market regulation may only provide temporary relief from deep underlying problems such as the poor allocation of resources, such as state life support for loss making government firms, it said.