Aside from the prospect of a hawkish Fed, almost nothing causes more furrowed brows among traders and serious market participants than indications that Beijing may be keen to rein in credit creation.
Over the years, the global economic cycle has become somewhat synonymous with China’s credit impulse. Shifts in Beijing’s stance on credit provision are generally not welcome if they’re seen as leaning in favor of tighter policy.
Early last month, Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission and Party secretary of the central bank, caused a stir when he warned on speculative excess in US and European markets, and spoke of “reduc[ing] the high leverage within the financial system.” Guo also called the Chinese property market a bubble and chided locals for conceptualizing of homes as investments and speculative vehicles. That mentality, he warned, is “very dangerous.”
The message, I suggested at the time, was “pretty clear.” China was leaning in the direction of tighter policy going forward. Guo’s “bubble” warnings came just weeks after Beijing engineered a cash squeeze, prompting more than a little consternation.
Fast forward to the second quarter and China is apparently looking to turn the screws. “China’s central bank has asked lenders to rein in credit supply, as the surge of lending that sustained the country’s debt-fueled coronavirus recovery renewed concerns about asset bubbles and financial stability,” the Financial Times reported Sunday.
Aggregate financing hit 5.17 trillion in January and new yuan loans touched a record 3.58 trillion for the month, as the seasonal surge boosted lending. The 1.36 trillion in new yuan loans offered in February topped the highest estimate from more than two-dozen economists in Bloomberg’s survey.
According to FT, the PBoC in February instructed domestic and foreign lenders to ensure new loans during 2021’s first three months didn’t exceed last year’s total. That’s according to people familiar with the matter. FT wrote that “the directive could translate into a considerable drop in bank lending.”
This is a bit ambiguous. It depends on what’s meant by “bank lending.” The focus is squarely on the property sector right now. Mortgage lending, as proxied by medium- to long-term consumer loans, jumped more than 70% in January and February, a period during which new home sales in China rose more than 130% and property investment jumped almost 40%, FT went on to say.
Apparently, this effort is complicated by the relative safety of real estate lending given the physical collateral involved, and it’s also playing out against a bifurcated market or, a “growing regional economic divide,” as FT put it in a separate article late last month.
The overarching message is familiar: Beijing is keen to control speculation in real estate and refocus on de-leveraging now that the pandemic is in the rearview for the world’s second-largest economy.
Summarizing recent developments, Bloomberg noted that in January, Shanghai and Shenzhen “further cracked down on housing speculation via fake divorces [and] a new mechanism on banks’ lending to the real estate sector also took effect, forcing some banks breaching ceilings on their real estate exposure to pare back loans to developers and home buyers.”
“We think that the credit impulse is about to peak and poised to turn down, as Chinese policymakers have shown every intention to resume the de-risking project,” SocGen’s Michelle Lam remarked. “The credit impulse surged in 2020, but should fall from here amid de-risking and policy normalization,” she said, in a recent slide deck. “If so, this would exert downward pressure on economic growth starting [in the second half].”
None of this is “new,” per se. The problem is that whenever headlines tout directives emanating from the PBoC, markets notice — especially when decrees are aimed at choking off credit.
One of the great ironies of macro is the juxtaposition between sometimes shrill calls for de-leveraging in China (in order to “defuse” the debt bomb) and the extent to which the fate of the global economy is tethered to the country’s credit cycle.