China Just Flooded Its Economy With A Record Amount Of New Debt

Tyler Durden's picture

China vowed that this time it was serious about finally deleveraging its economy. Once again, it lied.

First, a quick tangent: as a reminder, when it comes to the global economy, increasingly more analysts are realizing that just one number truly matters: that of the global credit impulse, which as we cautioned for the first time two months ago, had recently turned negative, mostly as a result of the recent deceleration in China's credit creation.

Then earlier this week, in a follow up report from UBS, the Swiss bank found two material developments: the reflation trade of the past year was entirely the function of Chinese credit dynamics...

... and making matters worse, China's credit impulse had now turned decidedly negative, suggesting a similar fate for the global credit impulse. 

As a result we were particularly interested in the latest set of Chinese monetary aggregates released overnight. They confirmed that China is clearly not yet ready to surrender its position as the world's primary drive of credit growth.

On the surface, the Chinese data was bifurcated, as Chinese new bank loan issuance was lower than expected totaling just over 1 trillion yuan, lower than the CNY1.17 trillion in February and below the consensus estimate of CNY1.2 trillion, as the government has tried to contain the risks from an explosive build-up in debt and an overheating housing market, at least when it comes to the traditional banking system. Even with the "slowdown", banks still extended the third highest loans on record for a single quarter, totaling 4.22 trillion yuan in January-March.

Loans to households surged to 797.7 billion yuan in March, according to Reuters calculations using PBOC data, accounting for 78% of all new loans in the month. That was much higher than either January or February and even the 50% of new loans in 2016. The rise likely was due to individuals increasingly turning to alternative types of loans as banks tighten rules on traditional mortgages, said Wendy Chen, an economist at Nomura in Shanghai.

"We think (the increase in short-term loans) is possibly due to attempts to circumvent strict regulations on mortgages," said Chen. "The high loans to households reflect that property sales are still very hot, and likely shifting from top tier cities to more third or fourth tier cities."

As Reuters observes, a surge in household lending in March also added to worries about whether authorities will be able to get the frenzied property market under control, even as cities roll out increasingly stringent curbs on home buying. While the central bank has cautiously raised interest rates on money market instruments and special short- and mid-term loans several times in recent months, most recently just hours after the Fed hiked in mid-March to avoid another spike in capital outflows and to contain debt risks and discourage speculation, it is treading cautiously to avoid hurting economic growth.

Indeed, as China's housing market continues to overheat, more cities have implemented strict home purchase rules, with some even restricting homeowners from "flipping" or re-selling properties they have held for only a brief time.

Yet while conventional loan issuance showed a modest moderation, it was more than offset by another dramatic surge in aggregate, or Total Social Financial, which includes both bank loans as well as off-balance sheet aka "shadow" lending, which not only rocketed in March to 2.12 trillion yuan from 1.15 trillion yuan in February and a record injection in January...

... but for the first quarter, TSF reached a new record high 6.93 trillion yuan - equivalent to the size of Mexico's economy - and well above last year's first quarter total. At today's Yuan exchange rate, China's credit creation in Q1 amounted to just over 1 trillion US dollars.

Entrusted loans, trust loans and undiscounted banker's acceptances - together a good indicator of shadow banking activity - increased sharply in March. Entrusted loans rose CNY203.9 billion, trust loans were up CNY311.2 billion and undiscounted bankers' acceptances gained CNY238.7 billion, according to MNI. These gains were several times larger than the increases of CNY166 billion, CNY73.2 billion and CNY17.3 billion, respectively, during the same period last year, and boosted Total Social Financing in March to CNY2.12 trillion, nearly double the February figure of CNY1.15 billion and the second highest level since March 2016.

"The increase of entrusted loans, trust loans and undiscounted banker's acceptances was probably caused by the restrictions on lending to companies in the real-estate sector and overcapacity industries, and many could only turn to shadow banking (for financing) even though it carries a higher interest rate," said Li Qilin, chief macro analyst at Lianxun Securities in Shenzhen.

In addition to Qilin, for most analysts, the spike in TSF financing confirms the ongoing surge in off-balance sheet lending, primarily in the largely unregulated shadow banking system, despite repeated attempts by authorities to target riskier lending in past years. Furthermore, this shadow lending surge has raised substantial doubts about the effectiveness of official efforts so far to clamp down on risks in the financial system - especially those emanating from various shadow banking intermediaries and SPVs, profiled recently in a Deutsche Bank report which cautioned that China's entire financial system is on the edge of an "uncontrollable liquidity event", and has prompted the central bank to inject record amounts of liquidity to keep the system stable.

But wait, there's more. 

Loans to companies totaled 368.6 billion yuan in March, less than half the amount of household lending, PBOC data showed. That is yet another ominous signal for the economy, unless firms are finding other sources of funding (which they very likely are in the shadow banking space, suggesting the money creation process is increasingly slipping away from traditional PBOC oversight.

Nomura's Chen said that the spike in non-bank credit growth in March may have been due to corporate borrowers turning to alternative funding channels as high demand for household loans crowded them out from traditional bank loans. She was also optimistic that the recent record surge in shadow lending will moderate:

"We don't think the strength in shadow banking activity will continue," Chen said, adding that regulators are expected to continue slowly clamping down on the sector.

We are not so confident, as the following charts from Deutsche Bank, and associated description suggest: "There has been a sharp rise in net claims to NBFIs from banks (Figure 33). We believe this is due to rising shadow banking transactions and also arbitrage activities with funds self-circulating within the financial sector. Clearly as shown in Figure 34, small banks are key lenders to NBFIs"

Perhaps our skepticism is unwarranted: in March for the first time, the PBOC's quarterly inspection of banks' books included off-balance sheet wealth management products to give authorities a better sense of potential risks to the financial system. It remains to be seen if the central bank will do anything to intervene and slowdown this unprecedented surge in reliance upon shadow funding sources.

Finally, in an ominous confirmation that this glut of new credit creation is not reaching the broader economy but is getting trapped by various asset bubbles (most notably housing) M2 money supply growth hit a more than 6-month low, growing at only 10.6% y/y in March, lower than the expected 11.1% rise and down from 11.1% in February.  The government has said it expects M2 to growth about about
12% this year.

On one hand, the slowdown reflects the moderately tighter policy stance by the People's Bank of China (PBOC), but more importantly suggesting that overall economic growth is poised for a further slowdown.

Adding to worries that the PBOC could cause a sharp imbalance in Chinese liquidity as it attempts to trek a fine line between injecting record amounts of loans on one hand, while gently tightening on the other, is that alone with bumping up some interest rates, the PBOC withdrew 705 billion yuan from the financial system through its open market operations in the first 12 weeks of this year, a 1.1 trillion yuan negative swing from a year ago, ING estimates. That said, analysts do not expect a full-blown policy rate increase this year, which could risk a knock to economic growth ahead of a key party meeting in the autumn when a new generation of leaders will be picked.

The central government has made containing financial risks a top priority this year, calling for vigilance against asset bubbles and urging companies to reduce leverage. But it has still targeted economic growth of around 6.5% this year, which will require the copious amounts of new credit that is continues to inject month after month, increasingly so via the unregulated shadow banking system.

The one silver lining: most of China's "Big Five" banks reported last month that bad loan ratios were stabilizing, likely giving policymakers more confidence that risks from bank lending are under control, although Chinese banks, which are mostly state-owned, are notorious for misrepresenting the true state of their balance sheet. Indeed, many analysts believe Chinese NPLs are far higher than banks admit, and some China watchers warn a debt crisis may be inevitable if loan and money supply growth continues to sharply outpace the rate of economic expansion for the foreseeable future (as shown in the chart below) and that a Minsky Moment may be the inevitable outcome, with the only question being "when?"

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debtor of last resort's picture

We shit on Minsky momeh. Party says lets Party.

flaminratzazz's picture

Printer races..what possibly could go wrong?

Everybody get in, we are going to go full throttle retard over the cliff

It will be great fun, you'll see...

Arnold's picture

Used to be lawn mower racing just was cheap fun.
Sigh.....left behind again.

pitz's picture

If they let off the pedal on debt creation, the Yuan soars to the moon on deflation. 

If the US lets the off the pedal on debt creation, the US economy crashes into default.

Creative_Destruct's picture

Exactly. There is NO possibility of deleveraging without throwing the entire planet into a debt death spiral.

sinbad2's picture

Not the whole planet, just the parts of the planet that are controlled by the US, the EU and the Americas.

Nobody would notice any change in Africa or central Asia, and countries with a surplus, would benefit enormously.

I would love to see an American President go to Moscow cap in hand to ask Putin for a loan.

directaction's picture

More debt fixes every problem.

Incubus's picture

Ill take 4 more debts sir

Roadguy7's picture
Roadguy7 (not verified) Apr 14, 2017 7:52 PM

Don't believe this idiocy. We all know about the silk road, their actual gold holdings and rare earth elements in addition to the capital reserves for their banks in relation to the fraudulent, deceptive u. s. banks. Whitey is lying again about the real situation of the bankrupt u. s. versus the juggernaut Chinese machine. Anytime the dow tanks, its not because of issues in the west but rather the belief that China is having economic issues. China is your daddy, you Western Hemisphere bitches.

Ban KKiller's picture

@At least we have a daddy.

nmewn's picture


Wilcox1's picture

Save face at all cost. This is going to crop up with the north korea thing.

DEMIZEN's picture

Xi to Trump: Dear Mr Trump, I thank you for the wonderfull dinner. The cake was really delicious.

Bernie Madolf's picture

Pursuing through the CSU carp, this little beauty stood out:

In September 2016, the State Legislature passed SB 1412, which allows the University to invest in mutual funds including equity mutual funds,


The bill would prohibit increases in tuition or reductions in course section offerings from being adopted because of investment losses sustained as a result of these provisions.

LOSSES?! Sounds like another job for Super Joe Taxpayer!

The Tyler's might enjoy this bill:

U4 eee aaa's picture

I don't know if you call the actions of a debtoholic lying. The reason is because when they are making the promises they actually believe they will never go back to the printing press again. The problem is that the minute the pressure ramps up, that sweet printer's ink just looks like such and oasis that they forget everything they ever said or promised to austerity

Until we get the war games scenario (the movie) where the government runs every possible debt binge solution and we wait for it to learn that the best solution is not to print, this debt print binging will continue

Yen Cross's picture

  In China ~~~ REPO reverse you< lol

Zepper's picture

Governments will KILL, BULLSHIT, SLANDER, ABUSE, RAPE, to keep themselves in power. Going into debt is nothing. More debt... who cares!!! Do you think anyone in the financial world cares? They want more debt. 


These debts will never be paid back!!!!! EVER!!!! another FAKE belief system on a planet of liars and deceivers. 


Something is coming there is no doubt. Its not debt or the financial system. That was 2007. No, Something bigger and much much worse... or at least my instincts tell me so. Lets all hope I am wrong.

sinbad2's picture

Debt, last time I looked Australia had about $1 trillion in foreign debt, most of that debt is written in US dollars, so if the US dollar crashed to 1 cent in the dollar, we would only owe $10 billion in US dollars.

At a cent in the dollar, the US could become the new China, and flood the world with cheap crap.

The US would have full employment, import nothing, and export everything, just like it did when it was a truly wealthy nation.

The only losers would be the banks.

So what's not to like about a US dollar crash?

pitz's picture

A USD$ crash is good if you have actual useful skills to make stuff that potentially could be exported.

But its a disaster if you're a MBA/politician/lawyer/SJW type who has just lived off of taxes or financial speculation your whole life.

Roadguy7's picture
Roadguy7 (not verified) Apr 14, 2017 9:24 PM

Another article calling for the end of China. They keep getting richer and richer while the most west goes broke and sends all their gold to Asia. The u s is barely growing while China is growing by over five percent. I know whitey will say the Chinese manipulate their data but it was whitey in the west that taught them and is much more egregious when it comes to lying about economic data. Let's see, 94+ million in the u s not working and the unemployment rate is under five percent. Nothing to see here. China imports a 150 metric tons of gold in January with roughly a 60+ billion current account surplus while the u s has a trade deficit of roughly 50 billion on average with a real deficit per annum of on and off record of over 7 trillion. Instead of building the silk road that will help the Chinese increase their trade by over a trillion per year the u s goes broke funding wars and healthcare while obsessing over sports, cheap trinkets and gets fatter and fatter and smokes more and more dope. The u s a superpower, I think not, but rather a paper tiger runs by idiots elected by arrogant and close minded fools.

silvermail's picture

Explain to me please, what is the difference for China if:
1. China will give their goods to the US, in exchange for new ink inscriptions about the growth of US debt, which can never be repaid.
2. China will not ship its goods to the US, but will simply distribute these goods to all Chinese citizens, without payment - for free?

What is the difference for China?!

China is a net exporter of food. Deliveries of food from the US to China, account for only 0.2% of food imports to China.
The common border with Russia allows both countries to easily resolve any problems with the supply of food and energy.
China and Russia do not need the US dollar for successful counter trade. I mean the exchange of goods, food and energy.

Yen Cross's picture

  In China you get Hi-Rise sandcastle for lot's-0-Yuan,> sans the concrete<

 Maybe the collapsing" Iron Ore", and finished metals 'rebar' markets are why China is shutting down refineries and buying iron from Amerika.???

  Labor/input~ costs and all??? *caugh *caugh



meditate_vigorously's picture

China is playing the Jews against themselves. China is not a free economy, like ours ostensibly is. They can erase all of the debt, because nobody owns anything. Their entry into the IMF means they are buying tangible assets with fake money on the world market. Just like everyone else should be doing before this fiat criminality ends forever.

Iconoclast's picture

Apols, just seen this, I'm in complete agreement, posted something similar.

sinbad2's picture

What's the bet we find out next week, or maybe next month, that China has dumped billions of US treasury bonds, as payback for the US trying to destabilize the Korean peninsula.

Iconoclast's picture

My word, the Chinese always replicate, improve and dominate. Having discovered the child's play of fractional reserve banking, currency brought into existence as debt, mass building programmes and colossal exports, allow the Chinese to avoid inflation and snap up assets for 'free' globally. They've won, they're in control, the USA is pwned.

conraddobler's picture

China isn't winning shit.

I remember when Japan was going to own the world too.

Look no one is saying that they aren't impressivve and if you gave them half a chance their determination would probably put them over the top but there is a problem they can not escape.

One wrong move by them and mass starvation strikes.

They are drinking the kool aid of modernization.

Mao would be pissed

They fell for the con and modernized which is now their own leaderships problem.  I don't know what you do with 1 billion starving people but serve them yourself as dinner.

K_BX's picture

why do you think mass starvation could strike? As far as I understand they are way beyond this point?

K_BX's picture

sum ting wong?

Consuelo's picture



"...many analysts believe Chinese NPLs are far higher than banks admit, and some China watchers warn a debt crisis may be inevitable if loan and money supply growth continues to sharply outpace the rate of economic expansion for the foreseeable future (as shown in the chart below) and that a Minsky Moment may be the inevitable outcome, with the only question being "when?"


'When'...?   Well, let's see...   'Any moment' now has been going on since 2008, wrt/impending China collapse/hard-landing/doom/implosion/crack-up/social-chaos/Minsky, etc., et al.      

Just hold yer breath a bit longer, Ok...?