Inasmuch as one can trust any data coming from centrally-planned governments, following last night below consensus CPI reading, China continues to telegraph that monetary growth is once again under control (at least for the time being): in January commercial banks extended CNY 1.04 trillion in Loans, up from CNY 480.7 billion in December, which however was well below the consensus of CNY 1.2 trillion. Outstanding CNY loans grew by 18.5% yoy in January, down from 19.9% yoy in December (market consensus: 18.7% yoy). Additionally, the just as "credible" Chinese M2 printed at 17.2% growth yoy, down from 19.7% in December (19.% consensus). The M/M seasonally adjusted annual growth fell to 1.5%, down from 14.5% in December.
Some more commentary from Goldman Sachs:
- The amount of CNY lending was slightly below expectations but represented a rebound in its sequential mom growth rate. However, the downside surprise in M2 was more significant and represented a significant fall in the M2 growth rate (both yoy and mom). We see several possible explanations for the lower-than-expected M2 number for now:
- The trade surplus fell more than expected which means less trade-related FX inflows, however, the amount of difference in the trade surplus of several billion USD is simply too small to explain the very weak M2 as the difference of the latter is measured in hundred billions of RMB;
- the amount of non-trade-related FX inflows might have fallen. However, we do not have data on this at this point and given the expected returns on interest rate and exchange rate, we think it is unlikely to fall by a massive amount from the very high level in late-2010 (consistently above US$300 billion per month in 4Q2010);
- there were some distortions from the Lunar New Year effects which probably depressed M2 data, especially via wealth management products (????) (though this is not necessarily the only or even main channel of distortion). Specifically, interbank interest rates were very high in late-January as a result of the surge in demand for liquidity before the Lunar New Year. Financial institutions offered a larger-than-usual amount of wealth management products which gave higher returns. It is possible that some of the normal bank deposits were used to purchase products offered by financial institutions and when the latter deposit the money at banks they are excluded from M2 by definition.
- If this is indeed the main cause of the slowdown in M2, then the tightening in overall financial conditions in January were overstated. We believe given the level of noise in January data across the board (including M2 but also inflation and trade), it is better to wait for February data before making a firmer judgement on the tightness of financial conditions. For now, we still believe the economy is in a state of overly strong growth, elevated inflation and relatively loose financial conditions.
Our take is that China is simply telegraphing that it has its inflationary situation under control. Which judging by the weekly surges in food prices, previously discussed here, is laughable. Yet it is everyone's duty to exude a sense of control, now that EMEA countries have shown what happens when governments lose control of inflation.
As always, for the best indicator of just who is winning the war on inflation(hint- not the central banks) keep an eye on grains, softs, meats and various other commodities.