China Announces New Stimulus Measures

Another day, another stimulus announcement by China.

One day after Beijing threw in the towel, and in addition to monetary easing announced it would be far more "proactive" in fiscally stimulating the country, Chinese banks received notice from regulators on Wednesday that a core capital requirement will be eased in order to support lending, as Beijing uses the ongoing trade war as a scapegoat to unleash another massive stimulus - think Shanghai Accord just without the foreign central bankers and without the US.

This is merely the latest in a wild scramble of easing initiatives unleashed by China in the past three months, and summarized in the chart below.

As Bloomberg reports, the PBOC told some institutions Wednesday that the so-called “structural parameter” in the Macro-Prudential Assessment of their balance sheets will be lowered by around 0.5 points, reducing required capital buffers.

Acording to Bloomberg sources, the PBOC said that the change is being made to support local financial institutions in meeting credit demand effectively, which is another way of saying allowing the country's banks to purchase more of China's AA- rated "junk bonds" which have tumbled in recent months.

Last week, the PBOC offered a record amount of Medium-term Lending Facility loans - with the proceeds meant to be used for purchasing the riskiest bonds - and has cut reserve-requirement ratios three times this year.

China's scramble to stimulate the economy, both monetarily and fiscally, comes as the country's broadest credit aggregate, Total Social Financing, has fallen to a record low as a % of China's M2.

The financial deleveraging campaign since early 2017 has resulted in a severe negative shock to aggregate credit supply. The real economy has begun to feel the pain, as credit growth slumps and interest rates rise.

As SocGen adds, China's recent deleveraging "policy shock" was first felt by the financial system. Financial leverage started to fall sharply in early 2017. Banks’ balance sheet growth decelerated from nearly 16% yoy in early 2016 to a historical low of sub-7% yoy of late, as banks moved quickly to cut back their shadow activities. Their shadow book – equity and other investments – is now outright contracting, contrasting with the annualised growth rate of over 80% in 2015-16 (Chart 4). Banks’ have also reduced their exposure to corporate bonds by one-third and negotiated certificate deposits (NCDs) by a quarter. Furthermore, total outstanding of bank WMPs – their off-balance-sheet shadow businesses – grew by only 1.7% in 2017, slowing from 50% per annum in the previous five years.

Starting in late 2017, financial deleveraging morphed into real economic deleveraging and growth in aggregate credit supply started to drop precipitately. Growth in total credit to nonfinancial sectors dropped to a new all-time low of 11.2% yoy mid-2018 from the peak in the current cycle of 17% yoy reached in March 2016 (Chart 6). The pace of deceleration picked up from 1pp every six months in 2017 to 2.5pp in 1H18. The slowdown is driven solely by the sharp deceleration in credit creation by nonbank channels (Chart 7).

Every shadow banking channel covered in TSF data – entrusted loans, trust loans and undiscounted bank acceptance bills – has at least one piece of new regulation and experienced outright contraction in 1H18. The impact on the real economy was over RMB3.7tn less new credit supply yoy via these more visible shadow banking channels in 1H18, and  new bank loans and recovering bond issuance managed to compensate only less than half of that loss

The question, of course, is what happens next, now that China has thrown in the towel on its latest aborted attempt to normalize its economy, and is once again engaging in a "deleveraging", which despite Ray Dalio's fondest wishes, will hardly turn out to be beautiful.