One week ago, Deutsche Bank analysts warned that the global economic boom is about to end for one reason that has nothing to do with Trump, and everything to do with China’s relentless debt injections. As DB’s Oliver Harvey said, “attention has focused on President Trump, but developments on the other side of the world may prove more important. At the beginning of 2016, China embarked on its latest fiscal stimulus funded from local government land sales and a booming property market. The Chinese business cycle troughed shortly thereafter and has accelerated rapidly since.”
DB then showed a chart of leading indicators according to which following a blistering surge in credit creation by Beijing, the economy was on the verge of another slowdown: “That makes last week’s softer-than-expected official and Caixin PMIs a concern. Land sales, which have led ‘live’ indicators of Chinese growth such as railway freight volumes by around 6 months, have already tailed off significantly. “
As DB concluded, “If China starts to slow again, the current risk-friendly environment has a short sell-by-date, particularly given rising oil prices and our view that any Trump stimulus will take at least a few quarters to work its way into US growth.”
Yes… but not yet, because as China reported overnight, in January Beijing injected the greatest amount of aggregate monthly credit, between bank and shadow loans, i.e., Total Social Financing, on record, amounting to an all time high $540 billion.
While China injected Rmb 2,030 billion in new loans, slighlty below consensus estimates of 2,440bn – still the second highest number on record – it was the surge in TSF that stunned China watchers: in total, China added a record Rmb3,740 bn in aggregative financing last month, far greater than consensus expectations of Rmb3,000 bn, and more than double the December total of Rmb1,626 bn. The implied month-on-month growth was 15.1% SA ann mom, up from 12.8% in December. (There was no issuance of local government bonds in January compared with Rmb102.3 bn of issuance in December according to WIND data.) According to the PBOC, TSF stock growth (not adjusting for local government bond issuance) was 12.8% yoy in January.
With loans coming below expectations, and total aggregate credit trouncing consensus, this means that in January, contrary to stated intentions to tighten and delever its shadow banking system, China unleashed the biggest shadow debt expansion on record, driven mostly by undiscounted bankers acceptances, as well as growth in both Trust and Entrusted Loans.
Some observations: although new loans at the beginning of the year tend to be seasonally high, in this January, the PBOC had been aggressive in keeping new RMB loans under check, on the back of inflationary pressures, rising leverage and solid activity growth. PBOC adopted a combination of measures including administrative intervention and market approaches such as raising the Open Market Operations rate. New RMB loans in January were, as a result, lower than market expectation, and its growth rate moderated slightly on sequential basis.
On the other hand, Total social financing surprised drastically on the, mainly due to the following reasons:
- substitution effect – because there was no local government bond net issuance and new RMB loan extensions were strictly monitored by the PBOC, commercial banks shifted to alternative credit channels such as bank acceptance bills (+Rmb613 bn in January vs. +Rmb159 bn in December last year) and trust loans (Rmb318bn in January vs. Rmb164 bn in December);
- lower real interest rates and better corporate profitability in 2016 compared with 2015, which raised credit demand.
More importantly, this surge in credit has also resulted in a major credit impulse not only in China, but also around the globe, resulting in the latest inflationary push higher, and also leading to better than expected economic data as the impact of China’s credit generosity entered the global economy. It also means that the inflection point envisioned by DB may not be here just yet.
In other monetary aggregate data, China reported that broad money growth accelerated slightly from December on a sequential basis. The drag from fiscal deposit change mostly dissipated (fiscal deposits increased by Rmb412.4 bn, lower than the increase in January 2016 and 2015). FX outflows have probably remained large in January, which would dampen M2 growth.
As Goldman notes, “January money and credit data highlights the difficulties facing the PBOC. It is increasingly difficult to control broad liquidity supply to the economy amid an increasingly sophisticated financial market.”
Curiously, according to Goldman this latest record credit push may be the last hurrah:
“we see rising pressures for the monetary authorities to raise funding costs, even though we expect the central bank will be likely to continue with its stringent window guidance. Stronger sequential broad credit (adjusted TSF stock) growth tends to be supportive of short-term activity growth. We see rising upside risks to our forecast of meaningfully weaker sequential growth in 1Q, although qualitatively speaking, 1Q sequential activity growth is still likely to be weaker than it was in late 2016.”
Finally, the latest confirmation that Deutsche Bank may indeed be right following the record January credit expansion, comes from Moodys, which wrote that “a combination of tighter liquidity and stricter regulatory scrutiny on commercial lenders’ off-balance sheet activities will dampen fast-growing shadow banking activity in China, Broad shadow banking assets, including entrusted loans, financing through trust companies, undiscounted bankers’ acceptances, and wealth management products (WMPs) reached 58 trillion yuan ($8.42 trillion) in the first half of 2016, equivalent to 82% of gross domestic product, according to Moody’s. As Caixin redundantly adds, “the shadow banking business is still growing.” The Industrial and Commercial Bank of China (ICBC), the world’s largest bank by total assets, plans to issue additional WMPs worth 250 billion yuan in the first quarter of 2017, said employees of the state-owned lender. At the start of this year, ICBC managed 1.68 trillion yuan through WMPs.
While big banks are net fund suppliers in the interbank market, small and midsize banks, securities firms, and other financial institutions are net borrowers, the Moody’s report said. It pointed out that smaller banks rely heavily on wholesale funding, including aggressive issuance of certificates of deposit, and the purchase of WMPs in the interbank market as a way to boost profits amid declining net interest margins.
“Small and midsize banks are active investors in shadow banking products, including other banks’ WMPs, the trus and asset management plans of non-bank financial institutions,” the Moody’s report said. A growing reliance on wholesale funding exposes smaller banks to possible liquidity shocks caused by the withdrawal of funds by other financial institutions, especially when demand for cash increases at the end of the year or if default scandals occur, which in turn prompts the smaller banks to call back their own funds.
The growth of shadow banking may slow as regulation becomes more stringent, which mainly targets off-balance sheet WMPs, said Xu Jing, an assistant analyst with Moody’s Investor Service. In December, China’s central bank confirmed that it would include banks’ off-balance sheet WMP business in the Macro Prudential Assessment framework, a system to monitor commercial lenders’ credit exposure.
Following the record January expansion, China will have no choice but to take action if it hopes to have its “tightening” actions be taken seriously by the market and the global financial community.