There was a palpable sense of disappointment last night when instead of cutting its benchmark overnight interest rates as some - notably Goldman Sachs - had speculated might happen, the PBOC announced that it would only lower its benchmark 1- and 5-year lending rates, i.e., Loan Prime Rate, by 10bps to 4.05% and 5bps to 4.75% respectively, a move that was widely anticipated.
The underwhelming rate cuts left analysts asking for more as consensus emerged that piecemeal lending rate cuts can only help the Chinese economy so much, especially if China is indeed set to unleash fiscal austerity as local Chinese media reported over the weekend: “The ten basis point reduction will help companies weather the damage from the coronavirus at the margins,” Julian Evans-Pritchard, senior China economist at consultancy Capital Economics, wrote in a note after PBOC published its latest loan prime rates. “But even if the ... cut is passed on to all borrowers, that would only decrease average one-year bank lending rates from 5.44% to 5.34%. The ability of firms to postpone loan repayments and access loans on preferential terms will matter more in the near-term."
However the market's bitter taste from the underwhelming rate cut was quickly reversed after the PBOC reported its latest monthly credit data, which was a whopper, blowing out market expectations: total social financing, the broadest credit aggregate, soared by over 5 trillion yuan, the biggest one month injection on record, surprising the market to the upside mainly on higher government bond issuance. According to Goldman, "this mainly reflected the economic conditions and policy stance as the economic impacts from the virus were still rising."
Here is the summary from the January credit stats:
- Total social financing: RMB 5070BN in January, vs. consensus: RMB 4200bn.
- New CNY loans: RMB 3340BN in January; consensus: RMB 3100BN.
- Outstanding CNY loan growth: 12.1% yoy in January vs December: 12.3% yoy
- M2: 8.4% yoy in January vs. consensus: 8.6% yoy, and above December's 8.2% yoy
Putting it in context, the total credit injection of more than 5 trillion yuan, or roughly $725 billion, in one month, was the single biggest on record.
The surge in TSF was mostly the result of another solid month in new yuan loan growth, which increased by 3.34BN, also the biggest monthly increase on record.
According to the PBOC, TSF stock growth (after adding all government bonds) was 10.9% yoy in January, the same as December. The implied month-on-month growth of TSF stock accelerated to 12.6% (seasonally adjusted annual rate) from 11.1% in December, largely due to a burst in local government debt. If we exclude central government bonds and general local government bonds from the TSF flows, the TSF stock growth moderated marginally to 11.0% yoy in January from 11.1% in December.
Issuance of local government special bonds is one of the key tools of fiscal policy. According to Wind statistics, local government special bonds of RMB 63bn have been issued in the first 20 days of February and another RMB 56bn of special bonds are in the pipeline as of Feb. 25 (Exhibit 3).
That said, since the local government debt does eventually enter the local economy, even if under the form of embezzlement and corruption, there is no reason to exclude it, which means that January saw the biggest credit injection in Chinese history.
But the most notable change, was the first positive print in China's shadow banking proxy since March 2019, which increased by CNY181BN, in what according to Goldman was the "clearest policy signal" in the month's data.
Commenting on the monthly credit data, Goldman said that January's broad credit data mainly reflected the economic conditions and policy stance as the economic impacts from the virus were still rising, and because "activity data in February will most likely be extremely weak."
Some more notes from Goldman:
- Over the past week, the top leadership in the government has given strong signals on the determination to reach the original economic targets. As a result, we expect the government to take forceful loosening measures from now to generate a rebound in activity growth big enough to broadly hit the annual targets. These measures will inevitably include measures to increase the level of broad money and credit supply growth, though they surely will include many other measures too, especially administrative measures to boost investment demand.
- It is not clear if February money and credit data will show this expected acceleration, as the economy has been subject to many government restrictions to production, consumption, and transportation. On the assumption that the recent deceleration of the spread of the virus continues, we should be able to see credit acceleration no later than March. The biggest threat to this view with forceful policy loosening leading to a significant rebound in growth would be if the spread of virus worsens outside of Hubei, especially in and around top tier cities.
Yet, despite the impressive record monthly injection, the next chart shows why any hopes that China can inject enough debt to reflate its way out of what is essentially a credit-driven slowdown, will be futile: as shown below, even with the biggest one month credit injection on record, M2's annual growth dropped in February to 8.4% to 8.6%.
The bottom line: even though the coronavirus may have given Beijing just the excuse it needs for a massive debt injection, there is now so much debt in China that it is unlikely that such piecemeal injections will have much of an impact.