In the latest Chinese domestic financing report released by the PBOC last night, there were two divergent themes: on one hand bank loans grew far less than the expected 700Bn yuan, and at 598Bn this was the second lowest monthly increase in the past year, only higher than October's 514bn; on the other hand total social financing soared to 1.82 trillion yuan, smashing forecasts of a 1.15 trillion increase, and the highest since June.
As noted last night, this may have been the catalyst that spooked the markets, because as Bloomberg confirms, "the data shows companies are turning to alternative sources for credit given banks’ reluctance to lend."
The history of new loan creation:
And total social financing showing the offset to declining loan formation coming courtesy of the local bond market:
And while this time Chinese companies are not turning to the shadow banking system, they are clearly taking advantage of the "last bubble standing", that of Chinese bond issuance.
While bond buyers will ultimately face the unwind of that particular bubble, what is concerning is the banks' reluctance to slow lending:
Banks have been reluctant to dole out more loans, fearful of their souring books. New yuan loans slowed to 597.8 billion yuan in December, trailing the 700 billion yuan median forecast. M2 money supply growth was 13.3 percent from a year earlier, compared to the median estimate for 13.6 percent."
The lower-than-expected new loans suggest that credit demand remained weak, and commercial banks were still reluctant to lend due to rising credit risks," economists at Australia and New Zealand Banking Group Ltd. led by Liu Li-Gang, head of greater China economics, wrote in a note.
Going by the official numbers, which are widely regarded as understated, bad loans rose to a seven-year high of 1.2 trillion yuan as of the end of September. In a sign of write-offs to come, policy makers are aiming for a clean-up of “zombie companies” that rely on government subsidies and bank loans to keep operating.
As we have been reporting over the past month, the biggest problem for China is that the real NPL percentage is much higher than the reported one, and today's admission by Chinese banks that they are unwilling to lend only validates concerns about soaring NPLs.
Here is the full breakdown of bank loans.
As for the total social financing print, it was driven as noted above, by a dramatic surge in corporate bonds.
"For the whole year of 2015, the biggest increment in aggregate financing came from the corporate financing via bond and stock markets," said Zhou Hao, an economist at Commerzbank AG in Singapore. "It appears to us commercial banks have few incentives to provide loans directly to corporates, especially due to credit concerns over SMEs, but turn to capital markets to finance the corporate indirectly. This hints an ongoing structural change in China’s financing system."
In summary, what is taking place in China is that banks are aggressively pushing off new credit creation from their books and giving it to the broader market to "risk" its balance sheet. Of course, whil clearly bearish as banks know the financial environment best, this was clearly spun as bullish "The rising bond issuance is due to lower barriers for companies to enter the market and falling interest rates, Wang Tao, chief China economist at UBS Group AG in Hong Kong said. "This helps cut the financing costs for companies," Wang said.
Judging by the market's reaction, which pulled the Composite below 3,000 and into a second bear market overnight, the spin did not work.