One of the more stunning economic updates this week was China's unprecedented surge in Chinese loan creation, when as reported earlier this week, China unveiled a whopping CNY3.42 trillion in Total Social Financing, its broadest debt aggregate, an amount greater than half a trillion dollars, of which CNY2.51 trillion was in new bank loans.
The reason for the surge was largely the result of frontloading loans, as well as lending to government projects in the first year of 13th Five Year Plan, which helped to boost loan growth. Many economists had expected loans to slow sharply in February as lending to government projects wound down.
However, it turns out this was just the start of China's latest policy, which is really just a return to its old policy of flooding the economy with debt: as Market News reports expectations that "January's surprisingly strong new loan growth would prove temporary may have been premature as bank officials in a number of Chinese cities say February new loans look to be just as strong, even with a week-long holiday in the middle of the month."
According to MNI, new loans so far in February were similar to the levels during the same days of January. The total so far in February is seen at around CNY2 trillion already.
MarketNews adds that this was achieved despite fewer working days in February because of the lunar New Year holiday, suggesting even more loans were churned out every working day.
It also means that if the TSF components rose at a comparable rate as in January, then the total increase in aggregate Chinese debt is on pace to surpass CNY6.5 trillion, or $1 trillion in new debt created in 2 months! This is roughly how much outside money the Fed added to the US economy during one full year of QE3.
The surge was surprising. As MNI reports, the strong January numbers had been expected to moderate for a number of reasons.
- Firstly, Chinese banks typically try to get as much loan money out the door as possible early in the year to maximize interest income for the rest of the year.
- Secondly, Chinese companies have been paying down foreign debt on expectations that the yuan would continue to weaken and that process has been expected to slow.
- Thirdly, and perhaps the biggest surprise in the February loan growth thus far, loans for government infrastructure projects that helped boost the January data were expected to slow. That does not appear to be happening.
This means that just like Japan panicked on January 29 when it announced NIRP, so China too has taken on what may appear a step of desperation and is hoping to jumpstart the economy by flooding it with record mounts of debt. Mizuho said in a note to clients late Wednesday that a massive stimulus package is likely in the pipeline.
"We expect public infrastructure projects to receive another boost to stabilize the economic downtrend. This may include construction of intra-city railways, railways in the central and western provinces and making improvements in the agricultural sector. A new round of massive stimulus, in our view, will be announced around the National People's Congress, which will likely convene in the second week of March," said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd.
To be sure, the immediate impact from this credit surge will be favorable, if only in the near term as the following chart shows:
The downside to the surge in lending is that while it could support economic growth as the government undertakes much-needed structural reforms, it is also increasing the country's already high debt burden. Credit is still growing much faster than even nominal GDP, which means China is getting far less economic bang for every yuan of lending.
Finally, recall that according to a Rabobank analyst, China's debt/GDP is already at 350%. At this rate, it will surpass Japan's 400% debt/GDP within the year, making China the most indebted nation in the world.
Most importantly, however, is that while the threat of NPLs coming to the fore has been a major concern for many China watchers, the indiscriminate surge in Chinese debt issuance means that the trillions in bad loans will be promptly masked by all the new loan issuance. It also means that China's day of reckoning has likley been pushed back by at least 1 or 2 quarters.