Overnight China released its latest monthly credit data which showed that even as China is trying to choke off its shadow banking sector, something we showed most recently last month when we discussed the biggest crash in net bond issuance on record, credit to the broader economy continues to flow, although it comes as M2 crashed to a new all time low and has prompted some nervous analysts to say that even this "crazy" loan creation number may not be enough.
The details: in June Chinese banks extended 1.54 trillion yuan ($226.9 billion) in net new yuan loans, well above analysts' expectations of 1.2 trillion yuan, and up from 1.11 trillion in May (which was also higher than the 1 trillion expected). Outstanding yuan loan grew by 12.9%, unchanged from a month ago, and more than the forecast 12.7% increase. Household loans, mostly mortgages, rose to 738.4 billion yuan in June from 610.6 billion yuan in May; these accounted for 48% of total new loans last month, down from 55% in May.
Some more from Barclays on the new loan breakdown:
Looking at the breakdown, corporate loans rebounded to CNY695bn from CNY609bn a year ago, with long-term corporate loans coming in at CNY578bn (year ago: CNY411bn) and short-term loans rising to CNY274bn (year ago: CNY198bn). Household loans remained strong in June, registering CNY738bn, compared with CNY712bn a year ago, of which short-term household loans rose to CNY261bn (year ago: CNY138bn). We note long-term household loans (mostly mortgage loans) slowed to CNY483bn, from CNY564bn a year ago. We continue to expect long-term household loans to soften given the PBoC's further guidance to commercial banks to raise mortgage rates and lower loan-to-value ratios recently.
Looking at the broadest debt and liquidity aggregate, Total Social Financing, the number soared to 1.78 trillion yuan in June from 1.06 trillion yuan in May, the highest print since March, when more than 2 trillion yuan was unleashed into the economy. However, as in recent months, the biggest contribution to TSF was from the regulated yuan loans at the expense of shrinking shadow banking debt: combined trust loans, entrusted loans and undiscounted banker's acceptances, the most common forms of shadow banking activity, dipped to 428.8 billion yuan in the second quarter from 2.05 trillion yuan in the first quarter.
Again, here is Barclays:
TSF registered CNY1780bn in June, slightly higher than the CNY1648bn a year ago, but the y/y growth rate decelerated (Barclays and consensus: CNY1500bn, Figure 4-5). New loans to the real economy (excluding loans to non-bank financial institutions) came in at CNY1448bn, up from CNY1314bn a year ago. We note that off-balance-sheet lending rebounded to CNY223bn in June from a contraction of CNY19bn a year ago, suggesting credit demand remains strong. Within the off-balance-sheet lending, trust loans rose to CNY247bn (vs. CNY81bn in June 2016), while entrusted loans and undiscounted bankers acceptance bills remained in contraction territory. At the same time, corporate bond financing remained subdued (June: CNY-22bn, vs. CNY201bn in June 2016) against the backdrop of policy tightening on developers and LGFV bond issuance. On a y/y basis, growth in TSF stock edged down slightly to 12.8% in June, from 12.9% in May.
And some bigger picture observations from Barclays:
China’s broad credit growth moderated in June, and we expect credit growth to decelerate further in the coming quarters. Our Barclays Alternative Credit Aggregate, which includes non-traditional sources of shadow credit and government bonds not captured by the official total social financing (TSF) measure, suggested that broad credit growth moderated further, to c.14.2% in June from 14.9% in May due to a deceleration in corporate and government bond financing. We expect the ongoing regulatory tightening to further slow credit growth, although the pace and extent will depend on policy implementation and coordination. We expect the housing market to slow but to remain resilient. Reflecting this, and in view of the government’s 6.5% GDP growth target and the need to ensure stability ahead of the 19th Party Congress this autumn, we expect BACA growth to ease to c.13% by mid-2018 from c.15% in May 2017.
Further adding to the theme of ongoing deleveraging, Bloomberg adds that "policy makers have tightened regulation to rein in leverage and curb risky credit as they strive to reduce financial risks, even as the overall debt burden in the economy continues to rise. Though tighter bond and money market rates are damping down speculative lending, June’s data indicates credit still is flowing to corporations and households. The “top leadership is frustrated that money in this economy refuses to go to the right places,“ said Andrew Polk, co-founder of research firm Trivium China in Beijing. “So far, tighter financial regulation is providing the beginnings of a remedy.”
Meanwhile, the trend of declining broad money supply as measured by the M2 aggregate, which includes demand deposits and money held in easily accessible accounts, grew 9.4% in June from a year earlier, missing expectations of a 9.5% increase and down from 9.6% in May: this was the lowest print on record.
The slower M2 growth, the central bank said last month, could be a "new normal" according to Ruan Jianhong, the central bank’s spokeswoman and head of its statistics department, after May's reading fell to the slowest since records began in 1996. The slide in M2 growth is the result of financial deleveraging, Ruan said and investors shouldn’t read too much into the downturn in money growth, she said. “Beijing is adept at saying stop with one hand and go with the other,” said Andrew Collier, an independent analyst in Hong Kong and former president of Bank of China International USA. A financial work conference scheduled for this weekend will focus on reducing risky credit while bank lending continues to “boom along,” he said.
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In summary, Chinese banks extended more credit than expected in June, as home lending stayed buoyant while a clampdown on shadow financing activities forced banks to shift more loans onto their books. As a reminder, Beijing has been tightening the screws on financial risks due to an explosive growth in debt but has been injecting substantial liquidity at key inflection points to avoid a crunch and maintain stability. The stronger-than-expected loans suggest authorities are keeping up support for the real economy, even as they tighten regulations to force banks to deleverage, said Nie Wen, an economist at Hwabao Trust in Shanghai. "The shadow banking sector is shrinking but credit for the real economy remains strong," he said quoted by Reuters.
Several analysts said the pick-up in new loans may be masking a slowdown in overall credit growth.
"While we think the PBOC is now done pushing up interest rates, we expect the monetary tightening that has already taken place to continue weighing on credit growth from some time," Julian Evans-Pritchard, China Economist, Capital Economics said in a report. Barclays' Jian Chang echoed the sentiment saying "China’s broad credit growth moderated in June, and we expect credit growth to decelerate further in the coming quarters."
Additionally, since slowing M2 growth is caused mainly by reduced lending to non-bank financial institutions and deleveraging, especially of shadow banks, the central bank will persist with its risk-reduction policies, said Gene Ma, chief China economist at the Institute of International Finance in Washington.
But not everyone is convinced that de-risking the financial sector can happen without affecting growth, and China’s economy is on a slowing trend in any case. That indicates China’s growth may disappoint, said Michael Every, senior Asia-Pacific strategist at Rabobank in Hong Kong. “Even the crazy aggregate financing figures are not enough to stop that slowing momentum.”
According to several policy insiders cited by Reuters, China's central bank will hold off on further monetary policy tightening and could even slightly loosen its grip in coming months as a deleveraging drive threatens economic growth and job creation ahead of a leadership reshuffle later in the year; in fact China is expected to keep the economy well-supplied with credit to avoid any major gyrations ahead of the upcoming political fireworks. To that end, the PBOC has reiterated that it would continue to implement a prudent and neutral monetary policy, and keep liquidity in the country's financial system basically stable in its quarterly monetary policy committee meeting.
Putting these numbers in context, in 2016 China's banks extended a record 12.65 trillion yuan in loans, just under $2 trillion, as the government encouraged credit-fueled stimulus to meet its economic growth target. While authorities have pledged to contain the recent credit explosion, which has stoked worries about financial risks from a rapid build-up in debt, it remains to be seen if China will be ultimately succeeful in achieving this without plunging the overall economy into recession, and more to the point, without prompting a shadow bank run at one of China's numerous Wealth Management Products, which as we explained previously, is one of the biggest risks facing the Chinese financial system at a time when Beijing is increasingly eager to let companies file for bankruptcy.