Chinese Economy Slows Further - Monetary Conditions Tighten As Credit Growth And M2 Both Come Below Consensus

Tyler Durden's picture

While geopolitical/logical news continues to dominate, the global economy still is supposed to be driven by something (even as the major slowdown to Japanese GDP is about to be factored in by economists). Today's important news in regard to marginal economic drivers comes from China where commercial banks extended CNY 535.6 billion in loans in February, down from CNY 1.04 trillion in January, substantially below market consensus: of CNY 650 billion. Same with existing credit: outstanding CNY loans grew by 17.7% yoy in February, down from 18.5% yoy in January (market consensus: 18.0% yoy). Just as importantly, M2 growth came in at 15.7% yoy, down from 17.2% yoy in January (market consensus: 17.0% yoy). China was officially slowing down long before of of the devastating news from Japan hit the tape.

More from Goldman Sachs:

Key takeaways:

  • Recent monetary data continue to be subject to potential distortions from several factors: 1) financial products such as wealth management products do not show up as normal deposits and are recorded as deposits made by financial institutions and hence excluded from M2; 2) measures to bring back off-balance-sheet lending tends to overstate the amount of lending.
  • With that said, we still believe the money supply and credit growth has decelerated. The main driver of this has been the quantitative control measures the People’s Bank of China (PBOC) has been implementing. These measures include implicit credit control via the Dynamic Differentiated RRR System as well as more explicit window guidance to keep loan growth in check.
  • Sector specific policies such as the restrictions on property purchases probably only impacted the structure of lending but not the level of overall lending. This is because given the demand for loans remain strong, lower loan supply in the property space will just be replaced by higher loan supply in other areas if there had been no overall credit control measures. However, these policies probably helped to cool aggregate demand growth because purchases of properties are at least as dependent on saving as loans.
  • The downside surprise in M2 was again more dramatic than the fall in the loan growth rate which was likely to be affected by the following factors (apart from the distortions mentioned above):
    • The trade balance turned into negative territory unexpectedly. There was a swing of US$14 billion or close to Rmb100 billion.
  • The level of fiscal deposits increased significantly. While in February 2010, the level of fiscal deposits fell, it increased by Rmb338 billion in February 2011. This represented a tightening in the effective fiscal policy stance despite various official comments about keeping it “proactive”. The difference between the two is typically in terms of the collection of government revenue. In practice “proactive fiscal policy” can often mean high expenditure and high revenue (hence proactively but not “loose”). The Ministry of Finance has only released January-February fiscal revenue data which showed a 36% yoy growth (sequential growth was even higher at 161% and 48% mom s.a. ann. respectively). Fiscal expenditure data has not been released (the margin of error to estimate this from the change in fiscal deposit and fiscal revenue is too large as there are other factors which can influence the level of fiscal deposits).
  • Overall, we believe monetary conditions have been tightened though the magnitude of the tightening was probably not quite as large as the M2 data would suggest. We believe this monetary tightening, together with other fiscal and administrative measures, was behind the slowdown in sequential activity growth (from a very high level to a high level so far) and lower-than-expected inflation since the start of the year. Our channel checks with commercial banks suggest lending in March is not significantly higher than it was in February which means financial conditions are still being kept relatively tight and there is no sign of any relaxation. This is clearly good news as the risks of a serious overheating is minimal. Although there are some who are starting to be concerned about a potential over-tightening, it is likely to be quickly reversed if it does occur and we are still some way off from there.


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Tulli's picture

It's all good.

Zero Debt's picture

Marc Faber's comment that the USD is no longer a valid unit of account really stuck with me. Because then, the RMB cannot be a valid unit of account either!!

If M2 is growing 17% and the nominal GDP grows 8%, then the economy is barely generating 0.5 RMB of activity per money base added. I can't wrap my head around this. Does it mean that the Chinese economy is contracting?

papaswamp's picture

I think the data is BS...just gives the Chinese reason to keep the yuan depressed.

ivars's picture

Seems that my February 6th predictions were fairly accurate when the stock market (DJIA) will peak. I predicted it will peak on Feb 15th, in the graph below. It did peak ( anyone doubts we are heading South from here?) at February 18th, just over weekend from my prediction. Now let us see what happens next, but all latest the news are encouraging ( meaning BAD) for the following months forecast. Its going to go down till end of May/beginning of June. Then a small lift, perhaps QE3, perhaps Oil prices will drop temporarily.

Also, my Oil price prediction from February 6th showed correctly the first peak in Oil prices in the end of February and now is showing correctly the drop during middle March. What it shows next, is a bigger peak than first one, with prices reaching approximately 10USD higher levels ( e.g Brent around 125-130 USD) then in previous peak, around April 1st.Then a drop again, to the same levels as today, in early May. And then it really starts going up. Its all mostly related to supply disruptions in Arab world, however, now we have also potential demand increase if nuclear sites worldwide are going to be closed for inspections/safety add-ons.

The graphs themselves are built by pattern matching after shocks for individual stock indexes and commodities , and for them to work, the index/commodity must be truly global, influenced by information from all over the world. Hence for DJIA and Oil it may wrork relatively well, let us see.

I explain how I made these graphs here:


I am taking the patterns of each commodity or stocks as they developed in the aftermath of 9/11 when the world experienced a shock and after that, an unprecedented period of NEVER before seen cooperation which later led to de cooperation , e.g on Iraq war issue etc.

So, in the period of Sept 2001- 2004-2006 the world slowly underwent transition from absolute cooperation ( remember Bush approval in the USA was 90%?) to normal deco operation levels. That impacted reactions to all information flows, aggregate reaction of people etc.

I try to match the graphs after 9/11 to graphs after another similar in its psychological uniting ability, financial shock of September 2008-March 2009 when world again showed extreme abnormal cooperation and synchronization of actions. And then it starts to de cooperate. The patterns should be the same, as each graph has its own time constant and interacts with all the other patterns in the world, aggregate the information- its well known that DJIA is , in fact, a biggest global information market, not just stock value market based on business performance-which has its own internal reaction times etc.- can be seen from linear damped oscillator response function to e.g. 2008-2009 financial shock. But, the graph has several pockets of non-linearity which damped oscillator does not have, like 2010 April-September dip. However, for information market as DJIA, its a typical dip whenever recovery happens after some shock , almost on all scales ( if not washed out by some bigger event).

I consider 9/11 and 2008 financial crisis comparable on scale of impact of cooperation levels shown by people involved, each by its own reason, but with the same behavioral patterns resulting.

There are some assumptions in it which make this exercise not so linear, that is where to place 9/11 on post 2008 graphs. That is a little trick to which I think I have found explanation, but would not delve into it now, as that is the key, but , if someone thinks about it, there is a logical place for a shift between minimums as preparations and decision making leading to 9/11 where done in secrecy and thus did not show up in DJIA , but it should have, if it had been known as decisions resulting in unavoidable act of terror with at fist unknown, than known targets, but unknown outcome.

After that, its just pattern matching plus some wishful thinking ( see my latest here on Silver- I essentially draw the graph, looked at it, and predicted an attempt to return to gold standard by whoever wins in 2012 - an attempt which most likely will either fail or will not look like Ron Paul imagines it today).

And so graphs are born, and then tested repeatedly as scales are changed , stretched, and timing remains the most difficult thing to be exact with.












Sudden Debt's picture

M2 money growth of 15.7% is totally normal... is show us inflation is nearly non existend...


jerry_theking_lawler's picture

TD....Borrrring...where is the juicy news today??