Three weeks ago, some were surprised to learn that after a blockbuster September, new RMB loans in China fell off a cliff in October, coming in at just [6] CNY514 billion against consensus of CNY800 billion.
Both corporate and household lending fell more than 60% from the previous month. In short: the credit impulse just shriveled up and died.
To some observers, this was a shock. After all, between multiple rate cuts and round after round of liquidity ops, you’d certainly think that banks would have excess cash to lend. Of course the problem isn’t liquidity. The problem is the economy and, in China, a worsening NPL problem.
Leaving aside Beijing’s souring loan crisis for now, the overarching point is that while central banks can keep the liquidity flowing, what they can’t do - despite what Draghi, Kuroda, and Yellen will tell you - is boost aggregate demand. This has become abundantly clear in the post-crisis world as trillions in global QE have failed to engineer a robust recovery in either global demand or trade.
When economic activity is anemic, you can expect the credit impulse to dry up. Businesses don’t want to invest when the economy is in the doldrums and when everyone has an overcapacity problem. As one loan officer at a Big Four bank told MNI over the summer, "our bank's loans in July in the Beijing area were even weaker than in June. We can't find the demand."
Well, as you’re no doubt aware, the ECB has thus far failed to give Europe’s economy the defibrillator shock everyone thought would come from the €1.1 trillion PSPP. Given that, and given everything said above, we weren’t surprised when the latest Survey on The Access to Finance of Enterprises in the eruo area showed that for EMU SMEs, the problem is not access to credit, it’s “finding customers.”
“Finding customers” remained the dominant concern for euro area SMEs in this survey period, with 25% of euro area SMEs mentioning this as their main problem, slightly down from 26% in the previous survey round,” the ECB said, adding that “access to finance” was considered the least important concern (unchanged at 11%).”
[7]
Why is this a problem (beyond the obvious)? Because as Reuters notes [8], “small-to-medium enterprises form the backbone of the euro zone's economy.”
As the ECB goes on to point out, “the external financing gap of euro area SMEs, which measures, at firm level, the perceived difference between the need for external funds and the availability of funds, has become negative at the euro area level for the first time since 2009.”
[9]
Or, graphically:
So once again we see that you can pump money into the system until the cows come home, but what you can't do is centrally plan an economic recovery no matter how many trillions in assets you monetize.
Put differently, you cannot print demand and you cannot print trade, and as we explained back in April [10], "those who have access to easy money can produce, dig, drill, and mine all they want but unfortunately, they will not witness a comparable increase in demand from those to whom the direct benefits of ultra accommodative policies do not immediately accrue."
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