Last week, in "Bad Debt Soars 35% In China As Government Set To Fabricate Dismal Loan Data," we noted that Beijing, in a desperate bid to claim that demand for credit hasn’t fallen off a cliff, is set to include loans made as part of the PBoC’s plunge protection effort in its monthly new loans data.
"The central bank will begin including interbank loans to non-banking institutions in its calculations, a practice which could mean the headline figure will be 'three times' what it would have been were it calculated using the old methodology," we said, citing MNI. "The PBoC," we continued, "will include loans made to CSF, China’s plunge protection vehicle, in the figures, meaning Beijing will pretend that the state-directed effort to artificially shore up the country’s stock market represents real, organic demand for credit."
This, of course, is completely absurd but that didn’t stop Beijing from doing it anyway and as transparent as it was, it was still good enough for a headline beat of epic proportions and drove M2 growth of 13.3%. Here’s the amusing spin from Xinhua:
China's new yuan-denominated lending rose sharply in July, new data showed, thanks to the central bank's easing measures such as interest rate cuts and the government's continuing pro-growth measures.
New yuan loans hit 1.48 trillion yuan (241.8 billion U.S. dollars) during the last month, up 1.61 trillion yuan from a year earlier, according to data released by the People's Bank of China (PBOC) on Tuesday.
M2, a broad measure of money supply that covers cash in circulation and all deposits, increased 13.3 percent year on year to 135.32 trillion yuan at the end of July, the central bank.
The PBOC spokesperson attributed the increases mainly to cuts in benchmark interest rates and bank's reserve requirement ratio and government's supportive policies to stimulate the real economy and prop up economic growth.
In reality, the "beat" had nothing (or very little) to do with policy rate cuts and everything to do with loans made to stem the stock market rout. Here's Barclays:
New loans and M2 growth in July surprised to the upside, dominated by one-off measures to stabilise the stock market. RMB new loans totalled CNY1480bn in July, almost double expectations (consensus: CNY750bn, Barclays: CNY790bn). However, more than half of the new loans (CNY886bn from CNY-47bn in June) were extended to non-banking financial institutions, while household loans and non financial institutions loans both shrank to CNY275bn and CNY313bn, respectively (June: CNY458bn, and CNY860bn). This reflects the government’s stock market support measures in the past month, with bank lending to securities corporations soaring. As a result, broad money (M2) growth jumped to 13.3% y/y from 11.8% previously, while base money (M0) growth remained flat at 2.9% y/y. At the same time, the CNY loan balance growth was up notably at 15.5% y/y, from 13.4% in June.
Overall, the strengthening of loan growth reflects China’s efforts to halt the stock market rout, hence, it could be short-lived, in our view. Loans to the real economy remain weak, suggesting modest domestic demand, which is consistent with our baseline growth forecast. We believe stabilising growth and channeling low-cost financing to the real economy will remain top priorities for monetary policy in H2 2015. That said, we maintain our view of one more benchmark rate cut of 25bp in Q3, accompanied by a removal of the deposit rate ceiling, and look for one or two 50bp RRR cuts in H2 2015, depending on liquidity conditions.
As you can see, loans to the real economy tumbled some 55% M/M to their lowest level since October and not only was the CNY886 billion in loans to non-banking financial institutions anomalous, it was flat out unprecedented. Put simply, it's an outlier that has no place being included in the data.
In fact, a closer look at the above reveals the truly dismal state of credit demand in China. Loans to households plunged 40% M/M, while credit extended to non-financial corporates dove 63%.
So no, the string of policy rate cuts Beijing has embarked on since last November have not stimulated demand for credit and indeed this is underscored by commentary from Chinese bankers themselves, one of which told MNI that banks simply "can't find the demand." Of course as we noted last week, we suppose that's ok as long as Chinese stocks continue to have stretches where they simply "can't find a bid", because when that happens, the PBoC can apparently create blockbuster credit growth out of thin air.