China’s July lending and retail appear weak

Courtesy of Also Sprach Analyst.

China’s big 4 banks have extended RMB220 billion of net new loans in July, up from about RMB190 billion in June, according to China Securities Journal.

Despite new lending at big 4 banks increased by 100% for the first half of July compared with the first half of June, total lending for the month of July has increased by about 15.8% compared with June.  Big 4 banks account for about 40% of total outstanding loans (stock) for banks.  Currently, market is expecting about RMB700 billion of new loans, but this later figure from big 4 banks suggest that the new loans figure could disappoint.

The report also suggests that there is no major improvement in terms of the mix of new loans.  The proportion of medium- and long-term loans has not increased as hoped, which raises questions about the funding for investment projects aimed at stimulating growth.  In fact, some banks have not even started lending to those growth stabilisation investments projects.  On top of that, private sector corporate demand for loans remains weak according to the report.

We need to clarify that what we usually hear about for net new loans figures in the monthly monetary statistics reports are the changes in total loans from the “sources and uses of funds” accounts, which does not include loans made by policy banks and lending between banks. The interbank assets come from the “balance sheet of other depository corporations”, which does include policy banks but exclude the central bank.

Let us say that the new loans figures derived from the “sources and uses of funds” are loans to the “real economy”.  The counterpart of these loans to the “real economy” in the “balance sheet of other depository corporations would be “claims on non-financial institutions” and “claims on other resident sector”.  Although they are not exactly the same, the loans to the “real economy” figures derived from these two accounts track each other quite well.

The lending figures derived from “claims on other financial institutions” and “claims on other depository corporations”, on the other hand, are what I call “interbank assets”.

The chart below shows the breakdown of these.  The reddish bars are monthly net new loans to the “real economy” derived from the “balance sheet of other depository corporations”.  The bluish bars are monthly net new interbank lending.  The red line is the monthly net new loans as reported in monthly monetary statistics.  As you can see, the blue bits used to be relatively small compared to the red bits until 2010, and the increase of interbank assets exploded since late last year and early this year.  For June, out of around RMB4 trillion of net new lending (as derived from the “balance sheet”), only about RMB1 trillion of that went to the “real economy”, quite consistent with the “sources and uses of funds” accounts, and about RMB3 trillion net new lending comes from the increase of “interbank assets”.

Alternatively, the total banking assets increased by about RMB4.6 trillion in June, RMB3 trillion of the increase came from these “interbank assets”. Needless to say, at this point, there is a question mark over the impact of this interbank lending on the real economy.

Meanwhile, China’s deflationary pressure, which has been showing in the past couple of months in the month-on-month changes in CPI, looks to be burdening retailers. The high level of debt in the economy as well as weak real estate market point to slow loan growth and, eventually, falling prices as debt deflation kicks in (although the real estate market seems to be coming back to life, we do not believe that is sustainable).

Bloomberg reports from Beijing that restaurants and retailers are offering discounts in hope of boosting sales volume at the expense of profit margins.  Notably, McDonalds (MCD) is offering discounted dinners amid slowing same-store sales growth.

This wave of discounts is not limited to fast food chains.  Electronics and apparels retailers are doing the same as sales slows and inventory build-up.

China’s second-largest electronics retailer, Gome Electrical Appliances Holding Ltd. (493), in July forecast a first- half loss even as its website offered discounts of as much as 50 percent. I.T Ltd. (999), a department store that sells brands including Levi’s and Puma in Greater China, cited discounting for narrower gross profit margins in the year ended February. Slower sales have left Nike Inc. (NKE) with too much inventory in China, its second-largest market after the U.S.

The discounting and weaker sales reflect the escalating pressure on local and global brands in China, where two years of economic growth of more than 9 percent encouraged companies to expand. International brands have relied on Asia to offset a spending slump in the U.S. and Europe.


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