One month after China, whose rapidly slowing economy is facing a soft landing at best and a hard, Lehman-like meltdown at worst should its housing sector implode now that the country's largest developer, Evergrande, is an insolvent shell of a company and contagion is spreading across China's dollar-denominated market, reported an unexpected drop in total credit creation, with the July Total Social Financing sliding to the lowest level since Feb 2020 at lust over 1 trillion yuan, in August Chinese credit staged a powerful rebound, with TSF nearly tripling to just under 3 trillion yuan as a surge in government bond issuance offset shrinking shadow bank credit, confirming our belief that China's credit impulse has now troughed
On Friday, the PBOC reported that in August total social ﬁnancing, overall RMB loans and M2 growth all accelerated from the slow pace in July. Relative to market expectations, total social ﬁnancing surprised to the upside although this was offset by a modest miss in new RMB loans while M2 growth also missed expectations of a bigger rebound from July.
Here are the key numbers:
- New CNY loans: RMB 1220bn in August (RMB loans to the real economy: RMB 1270bn) vs. consensus: RMB 1400bn. Outstanding CNY loan growth: 12.1% yoy in August (9.1% SA ann mom, estimated by GS); July: 12.3% yoy (8.8% SA ann mom).
- Total social ﬁnancing: RMB 2960bn in August, vs. consensus: RMB 2800bn.
- TSF stock growth (after adding all government bonds) was 10.3% yoy in August, lower than 10.7% in July. The implied month-on-month growth of TSF stock accelerated to 10.6% (seasonally adjusted annual rate) from 8.9% in July.
- M2: 8.2% yoy in August vs. Bloomberg consensus: 8.4% yoy. July: 8.3% yoy (-0.1% SA ann mom estimated by GS).
Of these, the most important is the broadest Chinese credit aggregate, the Total Social Financing, which tripled from its July level, and beating expectations, even though total RMB loans surprised to the downside. Sequential growth of TSF stock improved to 10.6% mom annualized sa in August from 8.9% in July according to Goldman calculations.
As shown in the chart below, among major TSF components, as government & corporate bond issuance and bill financing improved sharply, offsetting shadow banking clean-up and property credit tightening. Key drags were
- Continued decline in non-standardized credit growth given WMP cleanup efforts and tightening in LGFV financing, and
- Slower CNY loan growth (12.1% YoY in Aug. vs. 12.3% in Jul.), with moderation seen in both household loans and longer-term corporate loans, likely reflecting ongoing tightening in property-related credit demand.
On the other hand, corporate and government bond issuance accelerated. Meanwhile, the growth in bill financing climbed sharply for another month (8.6% in Aug. vs. 3.2% in Jul.) as banks used the instrument to fill new loan quota – a typical sign in the early stage of easing.
On loans to household, short-term loan growth remained slow at 4.2% mom annualized, while household mid-to-long term loan growth accelerated marginally to 9.8% mom annualized (vs. 9.0% in July). The decline in trust and entrust loans narrowed slightly in August, although bank acceptance bills remained largely muted after seasonal adjustment.
Overall RMB loans growth picked up slightly to 9.1% month-over-month annualized, from 8.8% in July. On the other hand, M2 year-on-year growth was slightly lower than market expectations and slowed from 8.3% yoy in July to 8.2%yoy in August despite a low base and slightly accelerated fiscal expenditure, due to weaker deposit growth for household and corporates amid slower growth in activity and credit. M1 growth continued to drop (4.2% in Aug vs. 4.9% in Jul) partly due to weaker property sales. This is to be expected since the total stock of M2 keep growing by hundreds of billions every month making every marginal increase progressively smaller in percentage terms simply due to the growing denominator.
On August 23, the PBOC held a meeting with large commercial banks emphasizing the need to maintain stable credit growth, which likely helped with an acceleration of loan extensions during the last week of August, and Goldman believes that the impact will be more visible in September.While Wall Street does not expect major policy easing on property and LGFVs regulations, some marginal relaxation in terms of implementation (e.g. PBOC’s guidance on acceleration of mortgage lending) would help with a rebound in credit growth, something desperately needed by China which for all its new-Marxist revolutions can stop pretending it can survive without massive credit injections. In terms of monetary policy, Goldman continues to expect one more RRR cut later this year, and expects government bond net issuance to increase in the next few months which would support overall TSF growth.
This leads to an important observation from Morgan Stanley, namely that the bank now sees broad credit growth bottoming in September. Some more details from the bank China strategist Jenny Zheng:
We maintain our view that broad credit growth could bottom in September and rebound modestly in 4Q on the back of a low base and possible acceleration of govt. bond issuance (central + local govt. bonds) – there are Rmb3.7trn remaining quota for Sept.-Dec. (vs. Rmb2.7trn for the same period last year), which suggest a monthly net issuance of ~Rmb900bn in the coming months.
In the NDRC press conference on Wednesday, policymakers also pledged to ramp up preparation work for infrastructure projects related to local govt. special bonds for the rest of this year and 1H22. In our view, this means policymakers will likely push for faster local govt bond issuance in the coming months and front-load next-year's govt. bond quota in 1H22, to arrest downside risks to growth.
In other words, as we said in July, China's credit impulse which recently turned negative and dropped to levels usually seen around major market inflection points, has troughed and still expect a positive print in the coming quarter.