On the surface, the latest Chinese credit data reported overnight by the PBOC was not particularly memorable: new loans tumbled from the near record 1.540TN Yuan in June to only 825.5BN in July, just above the 820BN expected, while Total Social Financing also declined substantially from June's 1.78TN to 1.22TN, also beating the 1TN estimate. While both July prints were a steep drop from June - reflected in Monday's miss in retail sales, industrial production and capex - they were a significant increase from the year ago numbers. At the same M2 dropped to a new record low, sliding from June's 9.4% to 9.2% in July, missing expectations of a modest rebound to 9.5%.
And while there are more details on the various constituent components below, there was one remarkable aspect to last night's number: for the first time in 9 months China's $9 trillion Shadow Banking Industry - defined as the sum of Trust Loans, Entrusted Loans and Undiscounted Bank Loans - contracted. These three key components combined resulted in a 64BN yuan drain in credit from China's economy, the first negative print since October, seen by analysts as more evidence that Beijing’s campaign to contain shadow banking and quash risks to the financial system, is starting to bear fruit.
At the same time, conventional forms of crediting enjoyed a surge, with net corporate bond issuance jumping as non-financial corporations opt for cheaper sources of finance than borrowing in the shadow banking sector, where costs have soared amid the government crackdown on shadow banks: in July Corporate Bond issuance jumped by 284BN following June's 17BN contraction. This was the highest monthly increase since November.
Furthermore, while on the surface TSF declined sequentially (if not year over year), there was RMB 754 bn issuance of local government bonds in July compared with RMB 461 bn in June, according to WIND data. After including this local government bond net issuance, total adjusted TSF stock grew at 14.8% yoy in July, higher than 14.2% in June. The implied month-on-month growth of adjusted TSF was 21.1% SA ann, higher than 9.7% in June according to Goldman estimates, suggesting that while the government may be phasing out shadow debt, it is replacing it with other, conventional forms of credit, which more than compensate for the transition.
Below is the full breakdown of the latest broad credit data, via Barclays:
- New loans recorded CNY826bn in July, compared with CNY464bn a year ago, with y/y outstanding growth accelerating to 13.2% from 12.9% previously. Both corporate loans and household loans increased greater than last year. New corporate loans advanced to CNY354bn from a decline of CNY3bn a year ago, with long-term corporate loans contributing CNY433bn (a year ago: CNY151bn) and short-term loans adding CNY63bn (a year ago: CNY-201bn). New household loans registered CNY562bn, compared with CNY458bn a year ago. While short-term household loans added CNY107bn (a year ago: CNY-20bn), long-term household loans (mostly mortgage loans) slowed to CNY454bn, from CNY477bn a year ago. We think the softening momentum in long-term household loans is likely to persist given the government’s tightening measures on the housing market will continue to exert downward pressure on new sales. In addition, M2 growth further decelerated to 9.2% in July (June: 9.4%), but M1 growth slightly rebounded to 15.3% from 15.0% in June (Figure 5).
- Total Social Financing reached CNY1220bn in July (a year ago: CNY479bn), and its y/y growth rate accelerated to 13.2% (June: 12.8%), the highest since November 2016 (consensus: CNY1000bn,). New loans to the real economy (excluding loans to non-bank financial institutions) rose to CNY915bn from CNY455bn a year ago. This, combined with the loan data, suggests that loan demand from both households and corporates remains strong. Notably, corporate bond financing strongly rebounded to CNY284bn in July (June: CNY-17bn, a year ago: CNY221bn), reflecting the recovering sentiment in the bond market following the improved regulatory policy coordination in recent months (Figure 8). The recovering bond financing may have also crowded out some off-balance-sheet lending, which contracted by CNY64bn in July (June: CNY224bn, a year ago: -CNY313bn). The contraction came from a drop of CNY204bn in undiscounted bankers acceptance bills (July 2016: -CNY512bn), while trusted loans and entrusted loans still expanded by CNY16bn and CNY123bn, respectively.
Finally, some interesting observations from Goldman's
- The fall in the level of RMB loans and TSF was completely seasonal. Adjusting for seasonality, growth of total social financing and RMB loans both accelerated in July from the previous month. The acceleration in broad local government debt adjusted TSF to 20% annualized level was particularly meaningful. There has been a rotation away from shadow bank to traditional banking financing in recent months as a part of the government's attempt to control shadow banking related risks and leverage while maintaining growth stability at the same time. Reflecting this tendency, loan supply has beaten market expectations for 4 months in a row.
- M2 growth surprised to the downside. Among the drivers of M2 growth, (1) RMB loan growth was robust, (2) FX flows (which contribute to M2 growth when foreign currencies are converted into domestic currency) were likely largely steady so didn't contribute to the M2 weakness either, (3) net fiscal spending (fiscal deposits held by the government are excluded from M2) made a negative contribution to M2 growth. June's fiscal policy stance was particularly loose compared to a normal year while July's was modestly tight. But this contribution was relatively small and not the main driver of slower M2 growth. This means the residual shadow banking products likely made the biggest (negative) contribution. The recent behavior of the economy suggests the impact of the slowdown in these shadow products on real activity is relatively modest, as long as broad TSF growth holds up--although other factors (such as strong external demand) have provided support as well.
- While July's activity growth data surprised on the downside, we do not see the need to be overly concerned about the growth outlook as the growth rate in June (particularly strong) and July (particularly weak) combined was at a robust level of 10% ann. Although the higher-than-normal July temperatures would tend to bias IP stronger than otherwise, this is still a healthy level of growth, consistent with loose financial conditions domestically and firm exports growth externally.
- We expect the authorities to fine tune policy stance on a real time basis to ensure growth stability at least before the end of the Party Congress. Even after the Party Congress this policy put will not disappear, it will just not be as strong as it is now.
Finally, there unspoken question is this: if China's massive, unregulated and largely uncontrollable shadow banking industry, which was roughly $9 trillion at last check, or not much smaller than China's GDP, is now shrinking and thus destroying capital, how long before the current "calm, cool and collected" snaps and the ongoing deleveraging morphs into a bank run, with dire consequences for the nearly $40 trillion Chinese financial sector?