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:
- 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.