During October, the credit impulse in China rolled over and died.
To be sure, the writing was on the wall before the data was released. Early in November, MNI suggested that according to discussions with bank personnel in China, data on lending for October was likely to come in exceptionally weak. As we noted at the time, that would mark a reversal from September when the credit impulse looked particularly strong and the numbers topped estimates handily. “One source familiar with the data said new loans by the Big Four state-owned commercial banks in October plunged to a level that hasn't been seen for many years,” MNI added.
Sure enough, when the numbers came in, new RMB loans to households fell 60% M/M and new loans to corporates declined nearly 40% from September.
To some, this was a shock. After all, multiple rate cuts and round after round of liquidity injections should have given banks plenty of dry powder to lend. But as we discussed at length (see here), liquidity isn’t the issue.
An acute overcapacity problem means corporates don’t need to invest and even if they did, overleveraged borrowers are beginning to have problems servicing their debt which makes banks reluctant to extend credit. Indeed, we really have no idea what the NPL picture really looks like in China thanks to the fact that lenders are encouraged to roll debt and thanks to the fact that some 40% of credit risk is carried off balance sheet or classified as something other than what it is (i.e. carried as an “investment”).
So what did China do? Well, they increased fiscal stimulus by a whopping 36%:
In short, when monetary policy fails to give the economy the defibrillator shock it needs, authorities must resort to fiscal stimulus and if the likes of Citi’s Willem Buiter have their way, China will just print bonds for the PBoC to monetize (nothing like printing a liability and buying it from yourself with another liability that you also print).
For their part, Credit Suisse doesn’t think any of this is going to work. Not the easing, not the fiscal stimulus, nothing. In a note out out today, the bank goes point by meticulous point to explain why “the impact from stimulus is muted.”
First there’s the big picture:
The government has become more active in terms of counter-cyclical measures since late summer. The PBoC has injected liquidity into the policy banks, through its selective easing program, and policy banks have invested in special infrastructure projects approved by planning agency NDRC. On top of the two batches launched at the end of August and October, NDRC is preparing another batch, probably for launch before the end of 2015. However, the impact of these stimulus measures on the real economy has been weak. 1) The private sector has not appeared enthusiastic about following Beijing’s lead. 2) Banks seem reluctant to lend. 3) Government officials and SOE executives have been demoralized by the anti-corruption campaign and salary cuts.
The “weak impact” of stimulus means that although the economy may “stabilize” in Q4, it will “slide again” in Q1 201
Export order flows have been slow while export manufacturers are shutting down factories amid surging costs and the recent threat from the TPP agreement. The private sector does not seem keen to invest because of poor profitability in the manufacturing sector. Private consumption is not weak, but is by no means robust. Property developers have substantially slowed down construction activity in order to cut inventories.
And although Credit Suisse contends that a hard landing isn’t their base case (which is odd because frankly, the hard landing has already occurred), the bank does offer the following rather alarming account of corporate health and the read through for bank balance sheets:
Still, we expect corporate profits to deteriorate significantly in 2016, as indicated by industrial sector nominal GDP growth. Feedback from the ground also suggests that not only are account receivables on the rise, but that some companies are now having to borrow to pay staff salaries. Corporate balance sheet deterioration may well be a theme in 2016, raising market concerns, in our view. A mirror image of that is the rise in bank non- performing loans. Our contacts among the banks seem increasingly concerned about the NPL issue in 2016.
Somehow, Credit Suisse’s takeaway from that assessment is that there’s no “systemic risk,” but we would beg to differ. We're not at all surprised to learn that Chinese corporates are borrowing to pay employees. It was just three weeks ago when we reported that, just as we predicted in March of 2014, China is reaching its dreaded Minsky Moment, as companies are set to borrow some $1.2 trillion just to service the debt they already have and otherwise remain operational:
As for what comes next, Credit Suisse says "the PBoC is likely to look at a deep cut in RRR in order to create more space for the banks combatting a rise in NPLs." What counts as "deep" you ask? Up to 400 bps.
Here, courtesy of RBS' Alberto Gallo, is a look at Chinese NPLs. Note that although the graphics also show special mention loans and doubtful accounts, the "real" numbers are still far, far higher:
Finally, note that Credit Suisse is now "less concerned" about the possibility that Chinese corporates that have borrowed in dollars will run into trouble should a Fed hike and China's desire to gradually let the yuan depreciate hurt the corporate sector's ability to service its debt: "Fed tightening may create turbulence for Chinese dollar debt borrowers, but we are less concerned now than we would have been before as the domestic debt market is now available to fund the rollover." Here's a chart that shows Chinese corporate USD borrowings - decide for yourself if the domestic market will fund the rollover: