First thing Wednesday morning, before the abysmal data deluge hit in the US and before all eyes turned to a certain “diminutive woman with a pixie haircut,” we made you a promise.
Specifically, we promised we’d get back to you with more details on what is perhaps the most important data the market got all day: TSF and new RMB loans out of China.
As a reminder, China is all that matters when it comes to the global credit impulse. As Citi’s Matt King put it earlier this year, “everything is made in China”:
Here, for those who missed it, are the May numbers:
- China’s May New Loans 1.11t Yuan; Est. 1t Yuan
- New yuan loans forecast range 690b yuan to 1.2t yuan from 33 economists
- May aggregate financing 1.06t yuan; est. 1.19t yuan (range 776b yuan to 1.99t yuan, 29 economists). April 1.39t yuan
- May M2 +9.6% y/y; est. +10.4% (range +10% to +11%, 36 economists). April +10.5%
This is a discussion that can get really fucking complicated really fucking quickly, so to simplify, think about it this way. China is trying to squeeze leverage from its shadow banking complex while keeping credit to the real economy flowing. New RMB loans represents credit to the real economy, and everything else in the TSF figure is shadow credit. So if Beijing’s plan is working, new loans will remain robust while the aggregate financing total will tick lower (again, that is a gross oversimplification, but that’s on purpose).
Basically, you want the dark blue bars in the visual below to keep rising while other sources of credit growth (any other color bars) to tail off:
Zooming in, this is a more granular breakdown (pay attention to the second straight month of falling entrusted loans):
Here’s Goldman’s take on the data we got on Wednesday (you’ll note it backs up our assessment of how you should look at these numbers):
Solid TSF points to strong real economy credit demand; deleveraging under way as TSF/M2 growth diverges. May 2017 total social financing (TSF) new addition came in at Rmb1.06tn, +57% yoy, driven by above expected new loans (Rmb1.2tn vs. Bloomberg consensus at Rmb1tn) and solid trust loan (Rmb181bn new addition vs. Rmb12bn in May 16) despite mounting regulation, suggesting strong real economy credit demand. Adding the Rmb246bn corp bond balance decline, likely on heightened bond yield, CAPEX financing still rose 98% yoy to Rmb401bn.
Do also note the bit about TSF and M2 converging. You’ll recall that a rising M2 multiplier is perhaps a warning sign that risky lending might still be running rampant. That’s something we discussed late last month on the way to showing you the following chart:
Here’s Goldman again:
TSF balance yoy growth remained stable at 12.5% yoy, while M2 yoy growth fell to 9.6% from 10.5% in April largely due to lower nonbank financial institution deposit and interbank investment growth. We view this as the result of successful collaboration among regulators to rein in excessive financial leverage, while maintaining a flexible policy stance to continue supplying credit to the real economy.
So what you’re seeing is what we might call “targeted tightening.”
That is, they’re trying to rein in shadow lending and anything that finances risk taking while preserving the credit impulse to the real economy. It’s a tough thing to do but it looks like they’re kinda, sorta pulling it off.
But – and this is a very big “but” – no one is really sure where all the credit extended via the channels they’re squeezing ended up or what it ended up financing.
It is quite literally a guessing game.
You just have to squeeze and hope nothing horrible happens. Invariably, bubbles will burst that you didn’t even know existed. Yield curves will invert. Metals mayhem will ensue. The bond market will suddenly crater. That’s part of it. And we’ve seen all of those things over the past six months.
Here’s how Goldman explained it in a note out earlier today:
The recent round of tightening in China raised renewed concerns over demand for commodities in the country. In fact, after the Chinese 7-day repo rate spiked in March, iron ore prices have fallen 40%. Unlike previous tightening policies that were mostly broad-based, the current tightening appears to be more “selective”. Exhibit 1 shows that entrusted loan and corporate bond issuance contracted notably in early 2017 but bank loans continued to grow at a brisk pace. Can Chinese demand for commodities withstand such targeted tightening?
Mercifully, Goldman finds that “bank loans tend to have the strongest correlation with commodity demand and the real economy historically [while] the correlations for other types of credit including entrusted loans and corporate bonds seem to be weaker.”
In other words: squeezing the shadow channels may not necessarily portend further commodities chaos.
In any event, the numbers and dynamics outlined above mean more for the global economy and markets than any Fed hike and you’d do well to remember that going forward, lest you should wake up one morning and wonder what the fuck happened overnight.