With investor attention increasingly focused on China's credit pipeline to see if the recent crackdown on shadow lending has unlocked other sources of debt in a country where growth is always and only a credit phenomenon, and where both the housing and auto sectors are suddenly reeling, overnight's latest credit data from the PBOC was closely scrutinized... and left China watchers with a very bitter taste.
What it showed was that traditional new RMB loans rose to RMB1,380bn in September, largely as expected (exp RMB1,360bn) from RMB1,280bn in August, with growth of outstanding loans unchanged at 13.2% Y/Y and up from 12.7% a year ago. New loans to the corporate sector rose to RMB677bn from RMB613bn in August, in which medium- to long-term loans rose to RMB380bn from RMB343bn in August. New loans to the household sector rose slightly to RMB754bn in September from RMB701bn in August, and the long-term loan component (mostly mortgage loans) remained largely flat at RMB431bn (August: RMB442bn). New loans to non-bank financial institutions were -RMB60bn in September versus -RMB44bn in August (average September level: RMB13bn). Also of note, M2 growth rose by 0.1% to 8.3% Y/Y in September, in line with market expectations, however as Nomura writes in a note this morning, monetary aggregate growth is no longer as important to the central bank’s policy making as it once was, and Beijing is focusing more on interbank liquidity conditions, aggregate financing and investment.
Where the data was especially interesting, however, was in the broader Total Social Financing category, which on the surface came in well stronger than expected printing at RMB2,205bn in September from RMB1,929bn in August, above the $1,550bn estimate, and the strongest month since January.
However, this being China, there was as usual a big footnote with this latest credit data: starting this month, the PBoC further adjusted its definition of aggregate financing by including net financing through local government special bond issuance - just two months after it added asset-backed securities (ABS) and non-performing loan write-offs into this measure - and the same LGFV source of debt which yesterday S&P said could contain as much as $5.8 trillion in off balance sheet debt.
Why did China revise its TSF yet again?
Simple: to "pump up" the credit numbers and telegraph to the market and consumers that Chinese credit is growing faster, and thus represent a stronger economy, than it is in reality. Indeed, the September jump in TSF was driven mainly by a faster local government bond issuance, while based on the previous definition, it fell to a weaker-than-expected RMB1,467bn from RMB1,518bn and below the RMB1,554 consensus, weighed upon by continued contraction of shadow banking financing and a decline in net corporate bond financing. Growth of outstanding aggregate financing, based on the new definition, slowed by 0.2% to 10.6% in September. If central and local government bond financing is included, growth in Nomura's "augmented outstanding aggregate financing" measure moderated by 0.3% to 11.2% Y/Y in September. This variance in TSF growth rates is shown in the chart below:
Broken down by category, despite the mild rise in new loans, new entrusted loans and trust loans combined were -RMB234bn in September, versus -RMB190bn in August, suggesting an even faster contraction of the shadow banking sector.
Meanwhile, net corporate bond financing slumped to RMB14bn in September from RMB338bn in August mainly due to the crowding-out effect from the recent surge in local government bond issuance on private sector financing.
As a reminder, the latest credit data came just as the latest reserve requirement ratio (RRR) cut by the People’s Bank of China’s (PBoC) became effective on 15 October, which replaced the RMB450bn of maturing medium-term lending facility (MLF) and injected a net RMB750bn of liquidity into financial markets.
So what's next? Well, with China now engaged in more aggressive monetary easing, and forced to resort to revising credit definitions to make it seem that its credit is growing at a faster pace than in reality, the latest weak September aggregate financing data calls for even more policy easing, according to Nomura's Ting Lu.
According to Lu, liquidity conditions will remain "reasonably adequate" by year-end, benefiting from recent rollout of monetary easing/stimulus measures. However, given a still subdued increase in aggregate financing and looming headwinds to growth, "the economy has not yet hit bottom and expect more policy easing/stimulus measures in coming months to safeguard the stability of growth and financial markets, and will likely include:
- More direct liquidity injections via RRR cuts, the MLF and open market operations (OMOs);
- Increasing commercial bank loan quotas
- More bond issuance and faster fiscal spending, especially on infrastructure investments;
- Less restrictions on quasi-fiscal measures for infrastructure investment (e.g., public-private partnership (PPP) projects and policy bank lending);
- Cutting the value-added tax, corporate income tax and social security tax to boost corporate investment and production;
- Implicitly allowing some major Chinese cities to ease property price controls and scrap other measures that distort the property market
That said, any upcoming stimuli are likely to be narrower, smaller and slower than in previous policy easing cycles" especially if the Trump administration starts paying even closer attention to China's monetary policy.