Lost in the fog of Poloz’s moment in the sun and Yellen’s offsetting dovish lean on Capitol Hill, was perhaps the most important data print of them all: China aggregate financing.
The TSF data is, in many ways, the grandaddy of them all.
To understand why, you need only have a look at the following set of charts from Citi’s Matt King which show that everything, including the global credit impulse, is indeed “made in China” these days:
So that’s why we care about China’s ongoing effort to squeeze the country’s labyrinthine shadow banking complex. The worry, simply put, is that “real” credit creation will become “collateral” damage (there’s a double entendre in there) in the push to stamp out leverage and speculation.
But beyond that, it’s important to remember that much of the credit extended via the “mind-boggling” (to quote SocGen) array of shadow conduits has financed all manner of trades and so, it’s not always clear what the consequences will be when you start turning the screws on speculation. You might, for instance, trigger mayhem across the metals complex or accidentally tip the domino that causes a bond market rout. Before you know it, you’re playing a game of Whack-a-mole.
In effect then, there are two components to this: 1) the 30,000 foot view that’s concerned with propping up the overall credit impulse and thereby the Chinese economy, and 2) ensuring that as you “cleanse” the credit creation machine, that cleansing doesn’t end up setting off some kind of horrific chain reaction with the potential to spill over into other markets both domestic and foreign. In both cases, China’s deleveraging effort poses a threat to global stability.
Ok, so with that, here’s the June data:
- China’s June New Loans 1.54t Yuan; Est. 1.3t Yuan (forecast range 900b yuan to 1.8t yuan from 39 economists)
- June aggregate financing 1.78t yuan; est. 1.5t yuan (range 1t yuan to 2.03t yuan, 33 economists). May 1.06t yuan
Right, so the first thing to note about the aggregate figure is that it represents a deceleration and indeed if you think about the “credit impulse” (or, three-month TSF as a percentage of GDP), it’s still below the 10-year average:
You always want to look at the breakdown to see where the negative numbers are, because that says a lot about what the fuck is is actually going on (and yes, the profanity is necessary there because as anyone who follows these numbers knows all too well, the main question is always – always – “what the fuck is going on?“) Here’s the granular look:
As you can see from the highlights, some of the off-balance-sheet shit fell again as acceptance bills and entrusted loans were in the red, with the latter now having contracted for three straight months. And then corporate bond financing contracted for a second consecutive month, although not nearly as deeply as it did in May, when that negative RMB246 billion number grabbed a few headlines.
But you can’t just note those figures and call it a day.
There’s also M2 growth to talk about. It slowed to a record low 9.4%. When you think about that, think about the contraction of off-balance-sheet lending and also the decrease in receivable investments and reduced lending to NBFIs:
As Deutsche Bank notes, what they’re doing is effectively stripping out superfluous layers from conduit financing. To wit:
The credit slowdown was partly attributable to a reduction in self-circulating funds, which were simply circulating among various financial institutions via multiple layers of SPVs without supporting the real economy.
Here’s a fun flow chart (note the ubiquitous use of the term “schemes”):
See those grey-shaded boxes on the right? Ok, so look at those and then extrapolate something about this:
If you believe that the elimination of those self-circulating funds is what’s being reflected in the slowing credit growth, then you can draw some conclusions about why the Chinese economy isn’t completely rolling over.
“The credit slowdown was partly attributable to a reduction in funds which were circulating among various financial institutions without supporting the real economy,” Deutsche Bank posits. Given that, “cutting them off would have a rather limited impact.”
Here’s what “limited impact” looks like:
There are all kinds of moving parts here and really, the line between what’s “shadow” credit and what’s not is just as blurry as the line between what’s “credit to the real economy” and what’s bullshit speculation. Indeed, one of the main problems here is that when you stamp out “speculation”, you can end up pricking bubbles, and that, invariably, trips up the broader economy.
Not to put too fine a point on it, but this is absurdly convoluted and it is nothing short of a miracle that something hasn’t gone horribly awry yet.
The key word there being “yet.”