Here’s The Most Important Thing You Missed On Friday

Here’s The Most Important Thing You Missed On Friday

Remember this chart from Citi’s Matt King?


That right there is your global credit impulse, and as you can see from the preponderance of red (which I assume Citi used in a kind of tongue-in-cheek way), China is almost the sole source of private sector credit creation.

What does that mean? Well, in the simplest possible terms, it means that if the PBoC’s efforts to stealth tighten via OMO hikes (indicative of Beijing’s struggle to rein in speculation and prick dangerous bubbles before they become systemic risks) end up choking off new credit creation in China, look out global economy.

With that in mind, consider the following headlines that got lost in the holiday shuffle on Friday:

  • China March New Yuan Loans 1.02t Yuan; Est. 1.2t Yuan
  • New yuan loans forecast range 1t yuan to 1.7t yuan from 31 economists
  • March aggregate financing 2.12t yuan; est. 1.5t yuan (range 1.2t yuan to 2.7t yuan, 26 economists). Feb. 1.15t yuan
  • March M2 +10.6% y/y; est. +11.1% (range +10.8% to +12.2%, 31 economists). Feb. +11.1%

“Slowing M2 growth in the first three months shows that monetary policy is prudent and neutral,” China’s central bank told Bloomberg in an e-mailed statement, adding that “slowing M2 growth also shows PBOC has strengthened regulation of financial leveraging.”

So, note the bolded bits in the bullets. They send a mixed message. What it kind of looks like on my end is an increase in shadow banking activity (the TSF beat) offset partially by a slowdown in M2 and new RMB loans occasioned by PBoC tightening.

That assessment seems to be largely in line with what everyone else is saying. Here are some useful points from Bloomberg:

  • “The economy continues to lever up. Even so, a slowdown in credit expansion and an acceleration in nominal GDP mean it is at least levering up at a slower pace,” Tom Orlik, chief Asia economist at Bloomberg Intelligence in Beijing, wrote in a note. “With growth robust, the People’s Bank of China will likely continue looking for opportunities to nudge market rates higher, as it leans against the risk of excess leverage.”
  • “Credit supply restraint isn’t showing up in the numbers,” said George Magnus, an associate at the University of Oxford China Centre and former senior adviser for UBS Group AG. “Credit creation is still running way too fast.”
  • “The PBOC’s tilt toward tightening hasn’t changed,” said Ding Shuang, chief China economist at Standard Chartered Plc in Hong Kong. “The increase of aggregate financing is slowing, although at a pace not as sharply as the market has expected.”
  • “The economy still shows strong demand for financing,” Shenyin & Wanguo Securities Co. analysts led by Li Huiyong in Shanghai wrote in a research note. “Still, the central bank’s tightening has already slowed M2 growth, and liquidity injections in the future will depend on the economic activities and policy targets.”
  • Components of shadow banking rose to 753.9 billion yuan, suggesting efforts to rein in growth of off-balance-sheet lending aren’t putting a much of a dent in such borrowing
  • New medium and long-term loans to households, made up mostly of mortgages, rose to 450.3 billion yuan. That category reached a record 629.3 billion yuan in January
  • The government increased spending last month as fiscal expenditures jumped 25.4 percent from a year earlier to 2.11 trillion yuan
  • M2 growth is in line with the economic expansion and the moderation shows that deleveraging is effective, the central bank said in a statement
  • The increase in new credit shows that the financial support to the real economy hasn’t let up, the PBOC said
  • Commercial banks have been slimming down their asset management products on the balance sheet and controlling bond issuance, the PBOC said

And here’s Goldman’s take:

Within TSF, supply of bank acceptance bills, trust, and entrust loans were strong (Exhibit 1), likely a reflection of the fact that commercial banks were not able to lend the standard RMB loans at will and chose these alternative credit channels instead. Amid higher interest rate, bond issuance became less attractive relative to borrowing via bank loans and the amount of issuance was relatively low. This is even true for local government bond issuance as well, which shows they are also sensitive to interest rate changes.

We believe the March money and credit data reflect the tightening bias of the government as credit demand and banks’ willingness to lend are both strong. While this tightening bias is not necessarily the clearest in the government’s rhetoric, it is apparent in the government’s action on interbank interest rates and even more apparent in the relatively subdued quantity of money and credit supplied, in our view. This suggests tightening is more dependent on quantity measures than the price channel and much more than the signaling channel.

Given muted CPI inflation data (so far, though we see this as temporary and expect it to rise significantly as the weather distortions disappear), lower PPI, and slow M2 growth (10.6%yoy actual vs. 12%yoy official target), significantly more aggressive tightening seems unlikely. However, as long as activity growth holds up strongly (we believe this is likely the case though it needs to be confirmed by the data to be released next Monday) and property price pressures remain significant, we think the monetary authorities can still maintain the tightening bias, especially given the long-term goal of controlling leverage. As the economy experiences a significant reflation, 1Q nominal GDP growth is likely to be above M2 growth for the first time since 2011 (though this cannot be said if one uses TSF/GDP as the metric).


We expect real economic activity growth to remain firm in 2Q, and nominal activity growth (such as industrial profits and import growth) to show more meaningful deceleration as upstream inflation moderates.

This is something you want to pay very – very – close attention to. If you ever need a refresher on why it’s important, simple refer back to the first chart shown above.

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