China's tremendous credit expansion from the first quarter of 2016 is now ancient history.
After the creation of $1 trillion in aggregate credit, or Total Social Financing, in just the first three months of the year, last month China slammed the brakes on new credit creation, when every aspect of credit growth came solidly below expectations. Then overnight we got the latest, May, data. It confirmed that after the record Q1 credit deluge, the PBOC is now scrambling to slow down the tremendous debt tidal wave. The core component numbers, i.e., Chinese loans, were not bad as new loans of CNY985bn actually printed modestly better than expected:
- New CNY loans: Rmb 985.5 bn in May (RMB loans to the real economy: Rmb
937 bn) vs. consensus: Rmb 750 bn. In May 2015, new CNY
loans were Rmb 901bn.
- Medium and long-term loans to Chinese companies, a leading indicator of fixed asset investment, reversed their decline of CNY43 billion in April to rise by CNY182.5 billion in May.
- Outstanding CNY loan growth: 14.4% yoy in May; April 14.4% yoy (13.2% SA ann mom).
But it was the ongoing dramatic slowdown in the broader, aggregate credit series, the TSF, that confirms how troubled the PBOC is with the recent record credit expansion, and is doing everything in its power to slow it down. Case in point, May Total social financing (TSF, flow) was only Rmb 660bn in May vs. consensus: Rmb 1000 bn, and down from April's Rmb 751 bn.
Note the dramatic slowdown.
This was the second worst months for total Chinese credit growth going back all the way to mid-2014 when concerns about China's shadow banking system first emerged.
Here are more details from Goldman on the breakdown:
May money and credit data were mixed. RMB loan data surprised the market on the upside but the broader measures of M2 and TSF data were substantially below expectations. Within the strong loan data, a large portion (Rmb 528 bn) was long-term household loans, which are usually mostly mortgage loans. While there are signs of weaker property sales in recent weeks, loan supply often lags contract sales so May credit data likely partially reflected this earlier strength in property sales. As some investors tend to focus considerable attention on RMB loan growth as a gauge of policy stance, June monetary data may ease their concerns about the potential for overly aggressive tightening following the People's Daily editorial by an “authoritative person” in early May.
However, RMB loans are no longer the main source of liquidity for the real economy and therefore it is more important to look at the broader measures.
Here, the adjusted TSF growth shows a clear deceleration from the April level. While M2 sequential growth rebounded from the exceptionally low April figure, it is still at the sub-10% level. Both TSF and M2 suggest somewhat tighter liquidity conditions, at least compared with a very loose 1Q. As we noted in previous comments, the government already started to tweak its policy stance in April, and the People's Daily article was released in May. (An analogy for this, in our view, is the driver of a car making a turn before flashing the signal). Still, we view the article as important because it may have changed the policy expectations of economic players such as commercial banks and firms in the real economy.
Tighter monetary conditions, lower future policy expectations, and less administrative pressures within the government were likely the key drivers of slower FAI growth after 1Q. The deceleration in FAI growth in the May data suggests its earlier rebound was totally dependent on policy supports. Meanwhile, FAI from the private sector has continued to decelerate throughout the year.
Overall economic growth has held up well in May, mainly because export growth was no longer a large drag on the economy as it was the case in 1Q. April and May growth tracked at 6.6-6.7% yoy in terms of GDP growth. As growth appears to be just on target, we expect policy stance to be kept largely stable until there are clear signs of significant deviation from the target.
But the biggest surprise was the following: since total Loans are a component of TSF, something must have posted a substantial decline in the May total credit data to offset the loan growth. And sure enough, one look at the table below reveals that in May, not only did FX loans, and corporate debt both decline, but bankers acceptance bills dropped by a record CNY507 billion, in what was a clear, if completely unexpected, episode of Chinese deleveraging.
In other words, as Dow Jones puts it, China's corporate bond market, one of the fastest growing sources of cheap credit, did something in May it hasn't done in in six years: it shrank. The outstanding amount of bonds contracted last month by nearly 40 billion yuan ($6 billion), as can be seen in the table above. The last time the corporate bond market contracted was 2010, but that was long before Chinese companies had wide access to bond financing.
As DJ adds, bond issuance apparently ground to a halt as fears increased about a handful of defaults.
Another factor: Issuance was extremely strong a few months ago, and Chinese companies may have gotten their fill and are taking a breather.
And then there was the plunge in banker's acceptance bills, which saw a record CNY507 billion contraction in the month of May.
Banker acceptance bills are a short-term debt instrument issued by a firm that’s part of a commercial transaction and that’s guaranteed by a commercial bank.
What? Here is a simpler explanation from Dow Jones: "these are a pseudo currency used by companies for payments that have been the subject of several instances of massive fraud."
Said otherwise, banker acceptances are the key component of China's shadow banking industry, and it appears that Beijing is once again cracking down on unregulated lending, or as BBG puts it, "China: Banks 1, shadow banks 0," is the scorecard from Tim Condon, head of Asian research at ING Groep NV in Singapore. "The authorities have cracked down" on bankers acceptances in response to a series of scandals.
Bank of Tianjin Co. in April reported a 786 million yuan “risk incident” related to its bill-financing business. China Citic Bank Corp. in January uncovered a 969 million yuan incident, while bigger rival Agricultural Bank of China Ltd. earlier revealed a 3.9 billion yuan bill fraud at its Beijing branch.
The combination of stronger-than-expected bank lending and weaker aggregate financing suggests there was a substantial reduction in alternative financing activities, said Raymond Yeung, a senior economist with Australia & New Zealand Banking Group Ltd. in Hong Kong.
"The higher-than-expected loans for May will reinforce our view that the PBOC will prefer not to stimulate massive loan growth," he said. "The monetary policy stance will still be moderately accommodative."
In short, hopes for a big credit push are again being dashed, and as this latest anti-credit impulse spreads first across China, then around the world, expect another "unexplained" bout of sharp economic slowdown as the world struggles to find a new source of fungible, credit-fueled growth.