Credit Shock Dead Ahead: China Money Formation Soars To 2-Year High As Delinquent Loans Surge By 29%

A month ago we pointed out that even as the Chinese credit bubble - at a record 240% of GDP on a consolidated basis - is now clearly out of control, the far more disturbing aspect of China's credit-fueled economy is the ever declining boost to economic growth as a result of every incremental dollar created. Indeed, as the economic response to "credit shock" becomes lower and lower, even as the inflationary impact lingers, the PBOC is caught between a stagnating rock and an inflationary hard place. Nonetheless, there are few options and with the shark-like need to continue growing, or at least moving, in order to prevent collapse, China did precisely what we expected it to do: boost credit growth even more despite the obvious tapering economic impact of such money creation. Sure enough, overnight China reported that its M2 growth accelerated in April from 15.7% in March, to 16.1% on a Y/Y basis: the fastest pace of credit creation in two years. Yes, the PBOC may not be creating money, but the Chinese pseudo-sovereign commercial banks, sure are, and at a pace that puts the rest of the world to shame.

From SocGen:

China’s M2 growth accelerated unexpectedly from 15.7% yoy in March to 16.1% yoy in April (Cons. 15.5%; SG 15.2%), the fastest pace in two years. Although a base effect was partly responsible, it is also the case that credit conditions continued to be very accommodative. The bigger than anticipated new bank lending figure – CNY 792.9bn or 26.9% yoy – is one piece of proof. Although the flow of total social financing normalised lower from CNY 2.5tn in March to CNY 1.7tn, the stock growth sped up further to 22.3% yoy from 21.6% yoy.


And there are those who wonder why food prices soared in April despite the obviously contractionary tumble in the PPI...

Furthermore, as we pointed out two days ago when we looked at the glaringly obvious export data manipulation, the idle-money inflationary pressures in China are likely far, far worse than what is reported, and with the SHCOMP unable to absorb excess liquidity due to its shallow nature (unlike the S&P or the Nikkei225), and with the government establishing new and improved housing market curbs with every passing day, all this soaring hot money is about to spill over into the economy, and which point it will not be the USD that Chinese consumers flocks to in order to preserve their wealth (hint: see 2011 when China had its last episode of outright spiking inflation).

But, as usually happens, that's just half of story.

Since in China, unlike the G-0 world, loan creation is still mediated by commercial banks (at least as long as the PBOC continues to sit on the sidelines), and not sourced directly by the monetary authority which can absorb virtually infinite bad loans before faith in the currency is shaken, the problem of bad loans is starting to become quite tangible. As China Daily reports, citing PwC research, the total mount of overdue loans among China's top 10 listed banks exploded by 29% in one year, rising to $79.3 billion at the end of 2012 compared to 2011.

Bad loans are weighing heavily on China's top commercial banks this year, and are likely to hit profitability and asset quality, a report released by PwC claimed on Thursday.


The study revealed that total overdue loans among the country's top 10 listed banks had increased to 486.5 billion yuan ($79.3 billion) by the end of last year, up 29 percent from 2011.


The average overdue loan ratio rose to 1.21 percent from 1.06 percent, "a considerable deterioration", said Jimmy Leung, PwC's banking and capital markets leader for China.


In some regions, the ratio reached 5 to 7 percent, he added.


The ratio of special-mention loans, debts that could potentially turn sour, among the five largest joint stock banks rose to 1.03 percent in 2012 from 2011's 0.93 percent.


Chinese banks follow the international five-category system that classifies loans as "pass", "special-mention", "substandard", "doubtful" and "loss", in line with their inherent risks. The last three groups are regarded as non-performing loans.

And here's another reason why China finds itself in a dead end dilemma with no way out: on one hand it does not want any more housing inflation for obvious bubble reasons. On the other, any collapse in housing prices will crash its banking sector. What to do?

"The economic uncertainties and tightened rules on the real estate market would pose a tougher test for commercial lenders this year," added Raymond Yung, PwC's financial services leader for China.


"If property prices show big declines, bank lending would be in jeopardy....It's time for Chinese banks to strengthen their management of collecting repayments, and writing off more soured loans more positively."

Only they can't, because that process would require the full disclosure of just how bad the true delinquent loan state of the commercial banking sector is. And since this is China, where economic data is always misreported by orders of magnitude, one truly is scared to look beneath the surface, and where such an event can be delayed (not avoided), only as long as new loan creation is soaring and is sufficiently high to offset the conversion of performing loans into NPLs.

Which, perhaps explains, why April new credit soared to the highest in two years. And this in turn, will be curbed too, once inflation - that ultimate arbiter of reality - comes roaring back.

In the meantime, and as always, we take delight in all amusing gold "smashes", "crashes", or whatever else they are called, as we continue to recall just what asset the Chinese bought with both hands and feet in all markets - physical and paper - in 2011, when China's inflation went off the charts. Because it wasn't the USD, and because we know that this time will not be different.