Following the previously reported collapse of Chinese trade, the Politburo had to find a way to keep the economy humming internally, since it couldn't rely on outside growth stimuli. As a result it did precisely what it has done every time in the past decade when it finds itself in a growth crunch: flood the economy with new loans, which just happens to be the main threat facing the Chinese economy, which as we have describe time and again, is now toiling under trillions in underreported and underestimated non-performing loans.
As the PBOC reported overnight, in January, Chinese new loan creation soared to RMB 1,470 billion, more than double the RMB 697 billion in December, and blowing estimated out of the water. This was also a 14% surge from a year ago, and most distrubing, the highest new loan creation month since the emergency interventions during the Lehman collapse!
As BofA commented on this surge, while "we do see headwinds for growth in 1Q15, but the January credit data suggest the chance of a growth slump in 1Q15 is quite small. We are comfortable with our 7.2% yoy GDP growth forecast (vs 7.3% in 4Q14). With the sustained capital fight, falling FX purchase and a weak growth, we expect the PBoC to continue its monetary easing measures."
Of course, the hangover from this latest credit splurge will come, and lead to even more headaches for China's SOEs but for now all is well, as the credit impulse translates into both Chinese and global "growth" if only for a month or two.
And while new loan creation continues to surge, China's Total Social Financing, which includes broader monetary aggregates such as various Shadow Banking components, did not surge nearly as muc, rising to RMB 2,050 BN from 1,695 BN the month before, slightly below expectations as China continues to clamp down on "shadow" sources of liquidity. The breakdown:
- New yuan loans rose to RMB1,470bn in January from RMB697bn in December. The share of bank loans in TSF has stayed above 70% since 2H14 (except December), suggesting that financial regulators stepped up standard credit support to the economy while they are still cautious on risks related to “shadow banking”.
- New FX loans declined to RMB21bn in January from RMB54bn in December. There was some recovery in FX loans (compared to the average monthly decline of USD20bn in May-November 2014), after the SAFE relaxed banks’ FX rules related to FX loan-to-deposit ratio starting from 1 January 2015.
- Nevertheless, the strong market expectation of CNY/USD depreciation could curb FX loan growth in the near term.
- New corporate bonds rebounded to RMB186bn in January from RMB76bn in December, on higher issuance and smaller expiration.
- New trust loans slumped to RMB5bn in January from RMB210bn in December, and new entrusted loans dropped to RMB80bn from RMB455bn. Those categories seemed to normalize from particularly high number in December, which could be in turn driven by one-off rush lending to local governments and funding to chase stock market rally via entrusted loans. Regulators tightened supervisions on entrusted loans and margin financing on 16 January, and the definition change on entrusted loans could help reduce double counting issues. Starting from January, the PBoC would exclude those entrusted loans which are for the purpose of cash management between different accounts of the same entity, but only include those normal entrusted loans granted by non-bank entities with banks acting as trustees.
- Non-discounted bankers acceptance (BA) rose by RMB195bn in January after increasing RMB61bn in December, helped by seasonality
Finally, and what is perhaps most disturbing, is that even as the PBOC was pumping loans at a torrid page of 14% Y/Y, actual Chinese M2 growth just slowed down for the fourth consecutive month, and dropped to just 10.8% in January, the lowest in series history.
In summary, China's January credit data hints that in some ways China is becoming like the US, and as ever more newly created credit money ends up in the stock market, is China about to follow the US and Europe and suffer a collapse in monetary velocity. Because whereas previously the biggest asset bubble in China was that of housing, now it is the stock market, which means that suddenly its monetary system is for all intents and purposes haunted by the same issues that affect western markets. So how long until China, too, which is battling both deflation and economic contraction, proceeds with outright monetary devaluation?