One of the most vexing issues for China at a time when trade tensions with the US have served to exacerbate the ongoing economic deceleration that manifested itself last year in the slowest pace of growth in 28 years, is the stubbornness of the monetary policy transmission channel, which remains “clogged”.
That “clogging”, means round after round of RRR cuts, liquidity injections and various targeted easing measures have generally failed to produce the type of real economic outcomes that would help bolster the domestic economy and, more importantly from a global perspective, buoy a reflation narrative that appears to be dying on the vine (hence this year’s coordinated dovish pivot from central banks).
Any number of analysts have weighed in on this over the past year and there are all manner of statistics and indicators you can point to as evidence that the transmission channel isn’t functioning efficiently. For instance, in a high profile note calling for a benchmark cut, Barclays wrote that “significant liquidity easing has not translated into a sustainable recovery in credit creation [and] the falling interbank rates have not translated into a lower average bank lending rate [while] financing costs of the real economy have remained elevated.”
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You might recall that there were some signs in the December credit data that stimulus is (finally) starting to work its way through. The headlines were seemingly upbeat, as TSF, new yuan loans and M2 growth all came in solid at CNY1.59 trillion (est. 1.3 trillion), CNY1.1 trillion (est. 825 billion), and +8.1% (versus 8% in November), respectively.
Well, as you might have heard, the January data is out and it’s off the charts – literally. Aggregate financing was 4.64 trillion yuan versus estimates of 3.3 trillion, while new yuan loans came in at 3.23 trillion yuan, well ahead of projections and the most on record in data going back more than a quarter century. Here’s the TSF breakdown via Barclays:
(Barclays)
The goal here, obviously, is to engineer a deluge of credit supply with monetary easing and use fiscal measures to create demand for that new credit.
Notably, shadow banking woke up in January, expanding for the first time in 11 months. The now years-long effort to squeeze leverage from the shadow banking complex has been variously blamed for inadvertently choking off credit to the real economy, but right up until the trade war got going, Beijing took a “you can’t make an omelette without breaking a few eggs” approach to that situation in light of how paramount it is that China reduce systemic risk.
On Friday, Goldman cited two reasons for the upside surprise in the January data. “TSF data include RMB loans to the real economy, which were 3.6tn – actually stronger than headline RMB loans of 3.3tn [and] shadow banking components of TSF grew slightly”, the bank notes, adding that “new trust, entrust and bank acceptance bills together were 343bn RMB, vs a contraction of 170bn RMB in December.”
For their part, BofAML has an overtly benign take on the data. To wit, from a note out Friday morning:
The rebound of TSF growth indicates that the PBoC’s easing efforts are finally kicking in, as liquidity is passed on from financial institutions to the real economy through credit extension. Abundant liquidity via RRR cuts and various other liquidity management tools, window guidance, relaxation of credit and regulatory controls, as well as other supportive measures (such as introducing CBS to support commercial bank liquidity) likely pushed financial institutions to lend more aggressively during the high-demand season in Jan. Besides strong RMB bank loans, the pick-up in bond issuance (nonfinancial corporate and local government special bond) was particularly notable, as policymakers were eager to improve funding supports for infrastructure investment activities.
There are two questions here. The first is whether the January surge in credit creation is sustainable, which is just another way of asking whether China is “pushing on a string.”
Assuming it is sustainable (and “sustainable” just means credit creation will continue to be robust, not that it will top January’s numbers, obviously), the second question is whether this is going to be enough in the face of i) trade frictions (the effects of which will linger even if a deal is struck in relatively short order), ii) a generalized slowdown in global growth and iii) the myriad idiosyncratic headwinds China faces as it attempts to mark a tedious transition away from a smokestack economy.
The answers to those questions have serious ramifications for assets of all stripes because after all, China is the engine of global credit creation and this is a world that runs on credit.
“Long-time readers know that I have spoken for years on the impact that the Chinese credit impulse has on the global economy, namely through the inflation / disinflation channel, with special focus on the rate of change showing significant sensitivity then to ‘cyclicals vs defensives’ and ‘value vs growth’ themes”, Nomura’s Charlie McElligott wrote Friday, before quoting his colleague Ting Lu as follows:
Record-high aggregate financing in January should be negative for RMB. Moreover, as local governments and corporates may have front-loaded part of their financing activity (particularly through the bond market) early this year, we believe a slowdown in the growth of outstanding (augmented) aggregate financing is quite likely in coming months.
We maintain our call for a more significant growth slowdown in H1, notably in Q2 due to synchronized negative demand shocks. It is only after this point that we expect Beijing to become more serious and aggressive about rolling out policy stimulus. We believe deregulating the property sector will be key to unlocking an economic recovery.
The story thus remains the same. Folks are skeptical about holiday distortions/front-loading, the monetary policy transmission channel remains impaired and even if it were “unclogged”, demand for credit is likely to be lackluster given prevailing uncertainty about the outlook.
Barclays offers some additional color that helps flesh out those points.
“Looking at structure of bank lending, the increase in loans was driven by increases in short-term loans and corporate bills (Jan: CNY1.4trn; Jan 2018: CNY0.7trn), while longterm corporate loans remained broadly stable at CNY1.4trn (Jan 2018: CNY1.3trn)”, the bank observes.
(Barclays)
They go on to say that when you throw in the rising trend in the ratio of short-term loans and corporate bills to new loans, you come away with the impression that “banks remain cautious about extending long-term corporate loans during an economic downcycle [and] demand for corporate long-term loans remains soft, given still-high loan rates compared with declining bills rates.”
(Barclays)
Essentially, then, this is the same story on the credit impulse side as what we described in relation to China’s above-consensus January trade data on Thursday. Recall our assessment:
Critics and naysayers will immediately point to front-loading ahead of the holiday on the way to casting doubt on the data. Be that as it may, all anyone was looking for was a set of numbers good enough to help allay fears that the Chinese economy is falling off a cliff, and January’s beat will work in that regard.
It’s the same thing with the credit data.
And just like China is the engine of global trade and commerce, the country is also the engine of global credit creation. That’s why it’s so dangerous for Trump to throw a monkey wrench into things at a time when Beijing was already juggling a lot of balls. Of course China has proven to be remarkably adept when it comes to keeping all the spinning plates aloft, so there’s a (bullish) argument to be made that this time will be no different.
The problem – as SocGen’s Albert Edwards wrote in December – is that Trump is a destabilizing force powerful enough to throw even the most experienced motorcycle riders into a “death wobble”.
