Deleveraging? Who Said That? China Credit Growth Booms Ahead Of Party Congress

Again, it's the spinning plates. 

So we got China credit data late Friday evening and it’s notable if only for what it says about Beijing’s desire to put its best foot forward ahead of the Party Congress.

Here are the numbers:


And here’s the visual:


This just underscores the tightrope walk for China. They’re supposed to be curbing credit expansion, leverage, and risk-taking. That’s part and parcel of the effort to squeeze the country’s labyrinthine shadow banking complex and head off the collapse that everyone has been warning about for years.

But that effort carries risks for the economy. When you curb credit expansion, you necessarily impede growth. Sure, you can try your best to “target” the tightening effort – to only turn the screws on the kind of unproductive, recycled credit that fuels speculation and never makes it to the real economy. But there will be collateral damage (figuratively and literally) and that will invariably show up in the headline numbers although this is China, so those numbers are malleable. Further, there’s no way of knowing where all of that unproductive credit ended up, so if you squeeze too hard, you end up bursting bubbles that you didn’t even know existed, a scenario that has ramifications outside of China because for things like metals, it’s not always clear whether prices reflect reality or speculation.

Finally, because China is the engine of global growth and trade, pressing too hard on the brakes risks destabilizing a fragile global recovery. Simply put: the weight of the world is quite literally on Beijing’s shoulders here and because not deleveraging isn’t an option, you end up with all kinds of spinning plates. Throw in the micromanagement of the currency and the ongoing effort to open up mainland markets without relinquishing too much in the way of centralized control, and it’s nothing short of a miracle that none of the plates have come crashing down – yet.

The PBoC’s recent RRR cut is a microcosm of this. Earlier this month, the PBoC announced an RRR cut for some banks contingent upon their lending to small businesses. It’s pretty straightforward as these things go: if you lend more than 1.5% of your new loans in 2017 or 1.5% of your total loans at end- 2017 to these small business, you get a 50bp cut and if you lend more than 10% of your new loans in 2017 or 10% of your total loans at end- 2017 to small businesses, you get an additional 100bp cut.

That’s just an effort to offset the tightening engendered by macro prudential measures designed to guard against systemic risks and to the extent we can differentiate between counter measures and overt easing, this is probably more akin to the former. Think about the timing. Here’s SocGen:

On 1 January 2018 – the time of the RRR cuts, the financial system and the economy will be facing several forces of tightening.

  • To financial institutions, the scheduled RRR cuts will serve to offset a potential liquidity shock resulted from further financial deleveraging measures. The PBoC is already set to include banks’ interbank borrowing in the macro-prudential assessment (MPA) starting 2018, so as to add pressure on banks to scale back their financial leverage. There may be more financial regulations in the coming months. A big liquidity injection will probably be needed to allow the PBoC to keep interbank interest rates within their current ranges, which is the technical definition of no change in the monetary policy stance.
  • The real economy will need some credit assistance to weather the anti-pollution campaign, which will likely cause severe disruptions to industrial production and construction activities in the next six months. While large enterprises may have sufficient cash flows to weather the supply shock, small companies are likely to need financial assistance. The conditionality attached to the cuts and the three month gap between the announcement and implementation should increase banks’ incentive to lend more support to those in need

In other words: it’s not an accident that this goes into effect in 2018. This is deliberately designed to be an offset and if you want to know why they didn’t just go ahead and implement an across-the-board RRR cut, the answer is simple: it sends the “wrong” message at a time when the “right” message is centered on de-risking the system.

So you have to look at the September credit numbers with all of that in mind.

But while the RRR cuts are reflective of the same dynamic, they are not of course captured in the September data. So what accounts for the strength? Well, the need to manage the optics ahead of the Party Congress. Here’s Goldman:

September data is of particular importance since it’s the last set of high frequency official data before the Party Congress which will start next week (October 18th, normally lasts a week). After two months of slow real activity and M2 growth in July and August, the government clearly wanted to at least stop the further deceleration of these indicators and likely wanted to show some rebound. The targeted RRR cut likely reflected these desires though itself has no immediate direct impacts on the economy and short-term liquidity conditions have remained largely steady. The strong broad money and credit growth in September is supportive of aggregate demand growth.

The government likely took other measures to support growth as well. Fiscal expenditure data has not been released yet, but fiscal deposit data (down RMB 397 bn, which is much higher than the usual level and roughly on par with last year’s record level) indicates strong fiscal supports. While fiscal expenditure was front-loaded in the first half, the government still has significant room to spend given that a disproportionally large share (of annual expenditure) typically is in December. Of course, near-term support will come at the expense of fiscal support in the rest of the year. We expect September and 3Q GDP data to beat market consensus forecasts when they are released right after the opening of the Party Congress.

The implication going forward is that things could decelerate into year-end. “[The September data] means there is little hope of further policy easing in the fourth quarter as the monetary policy is very accommodative,” Commerzbank’s Zhou Hao said, adding that “there could be even a tightening bias.”

But then that would crimp growth, which is a non-starter – especially considering we’re already down to 6.5% on the target.

Again, it’s the spinning plates.


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