Chinese Shadow Bank Lending Unexpectedly Plummets, Sparking China Growth Fears

According to most flow-tracking economists (and not their conventionally-trained peers) when one strips away the noise, there are just two things that matter for the highly financialized global economy and asset prices: central bank liquidity injections, and Chinese credit creation. This is shown in the Citi charts below.

And since it is indeed the case that just these two variables matter, then the world is set for a very turbulent phase because while global central banks liquidity is set to reverse a decade of expansion, and enter contraction some time in Q3 as the great "liquidity supernova" begins draining liquidity for the first time since the financial crisis...

... the latest Chinese credit creation data released overnight, added significantly to the risk of a "sudden global economic stop" after the PBOC reported that in June, China's broadest monetary aggregate, Total Social Financing, barely rebounded from May's 2 year low, rising to RMB1.138TN -  missing expectations of a 1.4TN print, and confirming that Beijing's shadow deleveraging campaign is accelerating and gaining even more traction, even if the threat of a global deflationary spillover is rising by the day.

A quick look at numbers reveals that there was not much of a surprise in traditional new RMB loans, which continued their rapid pace of growth, rising sharply from May's RMB1.150TN to RMB1.84TN, and well above consensus RMB1.535TN, growing 12.7% yoy in June, up from 12.6% last month

And yet even despite the 4th highest monthly increase in total new loans, Total Social Financing was still a disappointment, and for the second month in a row, was below the new loans print.

The reason is that while new loans - a core component of TSF - jumped, the drop in shadow bank was particularly sharp for the second month in a row: this has been the area where Beijing has been most focused in their deleveraging efforts as it’s the most opaque and riskiest segment of credit. And, as the chart below show, the aggregate off balance-sheet financing posted its biggest monthly drop on record in June

Meanwhile, the lass granular M2 reading also posted a growth slowdown, rising only 8.0% in June, down from May's 8.3%, below consensus of 8.4%, and the lowest on record.

Commenting on the ongoing slowdown in China's credit creation, Goldman said that the latest money and credit data highlighted the challenges the government is facing in loosening monetary policy.

Specifically, while the loosening policy intention should be clear judging from the RMB lending rebound and more net fiscal spending (June fiscal expenditure accelerated to around 7%yoy from 0.5%yoy in May), the effectiveness of the policy loosening is clearly questionable.

Meanwhile, commenting on the drag of non-loan TSF - which as noted above became even bigger than it was in May - Goldman said it was "clearly not the recent policy intention but a reflection of the earlier regulations on shadow banking activities."

Here Goldman notes something curious: in recent weeks there has been a lack of emphasis on deleveraging in officials’ comments.

Whenever the word leverage is mentioned, the “de-“ prefix has been substituted by the word “stabilizing” or “controlling”. The news on the delayed release of detailed wealth management product rules by the banking regulator is another indirect indication of the policy bias to treat this issue flexibly, especially when the trade war is on.

And while that does not mean the government is taking an U turn on this and allowing shadow bank activities to bounce back to old levels, the large falls like what we saw in May and June is not what they want to see either, at last not until the trade dispute is resolved. "The difficulty the government faces is how to fine tune the behavior of financial institutions", according to Goldman.

So what happens next?  Given this set of data and China's muted CPI inflation, it is likely that there will be a combination of policies including

  1. changing the policy tone to a more dovish one, especially at the Politburo Meeting to be held in late July,
  2. potentially further increasing the amount of on balance sheet RMB loans (although it could be partially offset by banks’ capital constraint),
  3. lower interest rates (July interbank rate fell from the level in recent months), and possibly cutting RRR further, and perhaps most crucially
  4. window guide the behavior of financial institutions so the non-loan TSF activities at least become less of a drag.

But further loosening measures are affected by 3 key factors, which according to Goldman include

  1. how hard activity data behave, which we will know on the 16th, in recent quarters the relationship between real and monetary variables has not been strong so it’s possible that activity data holds up despite being weak though downside risks are clearly high,
  2. how the markets react, especially A share, which is not knowable in advance in the short term, and
  3. how the trade war proceeds, which is not fully in China’s control and the 200 billion USD in additional proposed tariffs was likely a surprise judging from its reaction.

And while all these are all possible next steps by Beijing, what Goldman forgot to note is that with the Yuan more or less pegged to the dollar, as the Fed keeps hiking rates, Beijing will find itself on the bad end of an interest-rate differential, resulting in further Yuan declines, which - as recent history is a guide - can quickly mutate into a powerful capital flight, forcing Beijing to dump reserves to stabilize the currency, or alternatively, end the shadow easing process and hike rates.

But China's economy aside, the bigger question remains how long until the market realizes that between central banks and China, there is virtually no new credit - and liquidity - creation. Judging by today's push in the S&P500 above 2,800 it wont be today.


el buitre Colonel Klinks Ghost Sat, 07/14/2018 - 10:36 Permalink

In my opinion, Xi has cracked down on the loose shadow banking system of credit creation in China at this point because he is well aware that the GFC v. 2.0 is coming within the next 12 months which will make v. 1.0 look like a spring shower.  As a former long term resident of a Caribbean island dead center in Hurricane Alley, I see it as last minute hurricane preparation to minimize the effect even if it results in a slowdown in manufacturing.  Since such a large part of the Chinese economy is export driven, when TSHTF, much of their actual production will lose the bulk of their markets anyway due to global credit destruction.  Xi knows that this collapse is a century long plan on the part of the Anglo-American Zionist Cabal to finalize their total control over the planet, and he is setting up economic defenses, of which a stock pile of at least 35,000 tons of gold is not the least.

In reply to by Colonel Klinks Ghost

MoreFreedom el buitre Sat, 07/14/2018 - 12:05 Permalink

I agree.  There's a lot of leverage being used in China, and Trump knows that can easily lead to bankruptcy (for the politicians and their rich friends).   With a trade war (no one will win) it's a question of who will come to the table or abandon protectionism first. Those who are the most leveraged and depend on exports, will be the ones hurt first and the most.  That will also include a good number of US firms, but it's the Chinese who've expanded credit more than anyone IMHO.

In reply to by el buitre

MuffDiver69 Winston Churchill Sat, 07/14/2018 - 10:34 Permalink

Not really in The shadows

Some math and comment:

1) 2% inflation rate: Time to halve your money = 35 yrs. 36 yrs. by “rule of 72”.

2) Assuming inflation has reduced the purchasing power of the $ by 95% (5% left), here’s a quick inflation calc. from Federal Reserve Act of 1913 to today (105 yrs.): The return on your money by monetary slight-of-hand: -4.9% annual return, but it’s back-end loaded, mostly after 1971.

3) If “nominal” wages are increasing at 0% annual rate and inflation is running at “2%” annual rate, what’s the real return on your earnings? Answer: -2% annual rate. Hence borrowing to make up the difference. Bankers are happy.

4) Yes, inflation is a) “always and everywhere a monetary phenomenon”, meaning that an increase in the money supply dilutes the value of said dollars and reduces purchasing power, b) a covert tax, and c) a clear violation of the 5th Amendment:

“No person shall be… … nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.”

5) And yet here we are: “Clowns to the left of me, Jokers to the right,

Here I am, stuck in the middle with you.”

“The first duty of a man is to think for himself” – José Martí

“The last duty of a central banker is to tell the public the truth.” – Alan Blinder, former Vice Chairman of the Federal Reserve, 1994 on the PBS Nightly Business Report

“Fiat money eventually always goes back to its intrinsic value – zero” – Voltaire (Are we there yet?)

In reply to by Winston Churchill

Let it Go Sat, 07/14/2018 - 10:24 Permalink

People should be paying more attention to China. Over recent years Chinese money and wealth flowing across porous borders can be seen in soaring house prices in Vancouver and most of Australia, however, the subject we should focus on at this time has to do with recent data from China indicating a broad slowdown in activity. Data recently released points to the slowest investment growth in over 22 years which is a clear indication that regulatory crackdowns in the banking sector are starting to filter through to the broader economy. More on this subject in the article below.

 http://China Data Indicates Broad Slowing Of Economy.html

shortonoil Sat, 07/14/2018 - 10:40 Permalink

This may have noting to do with the Chinese central bank magical string pulling, and every thing to do with China's massive capital outflows. Higher interest rates, and sky high oil prices are having the same effect on China that they are having on India, and the rest of the EM. The PBOC is the wrong bank to be watching; FED and company are fattening their larder and the EM is supplying the grease.

J Mahoney Sat, 07/14/2018 - 11:25 Permalink

How in the world do they come up with data and charts on "SHADOW BANKING" ? Isn't the intent that it's below the radar? I do believe it exists and is very big in China but because it is undocumented, it can be used for "Fake News".

If you want to analyze it contrary to the article and define shadow banking (the known part originating with the large banks) ie money borrowed by payday lenders or "loan sharks" to re-loan at higher rates, a decline in those loans would suggest their economy is doing great as there is less demand for those loans.

itstippy Sat, 07/14/2018 - 11:44 Permalink

The term "Chinese Shadow Banking" bothers me.  The debt creation occuring outside of official channels and off the books ("Shadow Banking") was not some illegal activity beyond a helpless government's control.  China simply doesn't work that way.  No one was creating debt/credit agreements (money) without tacit approval of the Chinese central government.

Chinese Shadow Banking made a lot of numbers look terrific for a long time.  Lots of "growth".  However, when official numbers don't reflect economic reality sooner or later they must be brought into line in a controlled manner or they will bring themselves into line explosively.  The Peoples' Bank Of China knows this and is cautiously taking action.  

Just how accurate are the official economic numbers in the West?  

Tractor production is up!  

Consuelo Sat, 07/14/2018 - 11:52 Permalink

'Make a sound in the East, strike in the West'

'When strong, appear weak'

'Feign disorder, crush the enemy'


So what we have here now is 10 years of China's imminent 'hard landing' in some form or another, but since appearances are one thing, and reality can be quite another, it is beneficial to observe just what the Chinese have been up to behind the scenes - or as our esteemed fellow here, Winston Churchill would say, 'no coverage' of major events taking place in China.   All that is portrayed are 'ghost cities', chaotic market swings, various 'crackdowns', 'devaluations', etc.  What isn't portrayed are all of the bricks which have been laid - around the world, building a foundational support for China's long-term needs, and the reciprocal relationships achieved in the process.   The U.S. modus operandi?  Threats.  Intimidation.  Missile strikes.  And growing internal political strife.   The times ahead will indeed be quite interesting, as will the outcomes that few expect or are prepared for.


roddy6667 Consuelo Sat, 07/14/2018 - 11:59 Permalink

Back in 2009, when I first came to China, it took me 3 days to realize that 95% of everything I "knew" about China was bullshit. The American media is running a full tilt propaganda war against China 24 hours a day, and the citizens of the US are lapping it up. They don't travel. They don't check the media in other countries. They just believe what Washington approves for their consumption. What sheep!

In reply to by Consuelo

roddy6667 itstippy Sat, 07/14/2018 - 22:03 Permalink

All countries use artistic license with government numbers. However, in China, everybody is doing better year after year for decades. It's the undeniable results that speak the loudest.

The poor have come the farthest. Nobody is hungry any more, and the government is aggressively targeting rural poverty. The middle class is now 52% of urban areas and growing. And of course, the rich get richer. People don't need pages of chart porn to to how them that they are better off than last year and 10 years ago. They all know it. There is nothing any government can say that will give them more support of its citizens. America would be wise to realize this. "It's all about the economy, stupid."

This whole Western media meme of "empty cities" is a demonstration of their ignorance of how real estate is sold and owned and in China. Americans assume things are done the same way as in America. Very different here. The home ownership rate is 130% in China. In some cities it is 200%. Almost all the empty residential properties were sold. They were not built and the builder couldn't sell them. They got sold, mostly for cash, during construction. It is tradition for a family to buy a home for their son when married. This happens about age 30, so they have 30 years to save up for it. New homes are sold as concrete shells. It takes another 20% to finish. This will be done to the taste of the occupants at their expense before they move in. Being made of steel-reinforced concrete, they require no more maintenance than a bridge abutment. There is no property tax, so carrying expenses are nil.These empty units are a testament to wealth, not failure. Do Americans have the cash to purchase a second home as a wedding present?


In reply to by itstippy

MrNoItAll Sat, 07/14/2018 - 14:08 Permalink

Like any serious addiction, the only route back to non-addiction is the Path Of Pain. The greater the addiction, the longer and harder the road back. The global economy is completely addicted to debt. Bring the pain!

roddy6667 Lie_Detector Sun, 07/15/2018 - 23:23 Permalink

Don't consider yourself informed by watching a You Tube video regarding something on the other side of the planet. I have been living here in China for 5 years and visiting and traveling since 2009. I have never seen vaguely resembling this. I am retired now, but spent 15 years of my younger days working construction, including concrete work. I watch and monitor building projects in every city I visit. I also track home prices and sales. I was a Realtor for years and own a home here, so this all of interest to me.

There is a lot of misleading crap on the Internet about China, posted by individuals and groups with hidden agendas, some religious, some political. Don't be a puppet. Get a passport and see for yourself.

In reply to by Lie_Detector

Lie_Detector Mon, 07/16/2018 - 11:51 Permalink

All I know for sure is the quality of the things I buy that are made in China. They are no comparison to things made in the USA or Japan. My 20 year old Maytag stove is an example. It is used almost daily (many times several times per day) and has NEVER needed servicing. My 31 year old microwave oven made in Japan has never failed, even the original incandescent light bulb still works. Besides your city may have higher building codes.