After today’s shock Chinese credit numbers, ANZ’s perpetual call for reserve ratio requirement cuts is becoming a little shrill:
A sharp drop in credit extension suggests a significant increase in risk aversion among commercial banks, which could endanger China’s macroeconomic objective. As the tweaks in China’s monetary policy have not worked as intended, we believe a RRR cut is imminent in order to restore confidence.
• China’s new yuan loans were only RMB385.2bn in July, much lower than the market consensus of RMB780bn and RMB700bn in last July.
• The aggregate financing also surprised the markets on the downside, with a number even smaller than new loans, a first occurrence since the data’s inception. Undiscounted bank bills declined by RMB416bn in July, following a RMB144bn increase in the previous month, owing to the crackdown on the commodity financing after the Qingdao port fraud case. The trust and entrusted loan growth also softened, indicating that shadow banking activities have slowed down sharply, with further negative implication for the property sector.
• The M2 growth also dropped by 1.2 ppts to 13.5% y/y in July, from 14.7% in June.
• July’s monetary data suggest that Chinese commercial banks experienced a ‘sudden stop’ in credit extensions prompted by a significant increase in risk aversion. Even before this occurrence, commercial banks had tightened their credit exposure to certain industries and had started to shun commodity financing.
• Meanwhile, the outstanding non-performing loans of commercial banks have been increasing at a fast pace and China’s banking regulator has approved five new asset management corporations (AMCs) at the provincial level to handle the bad loans of commercial banks.
• Today’s monetary data should not be viewed lightly. It means that the financial system is engaging a rapid de-leveraging process, which could have significant repercussions on the real economy. Such a sharp drop in credit is in fact a quantitative tightening, which will lead to high interest rates and endanger China’s macroeconomic objective.
• Furthermore, it also suggests that the past monetary policy tweaks have not worked as intended. Although the PBoC has been always reluctant to ease, China’s macroeconomic objective will eventually outweigh the current monetary policy inertia. We believe a RRR cut is imminent in order to restore confidence.
I don’t know if they’ll be right but at least they appreciate the importance of the numbers, which is more than can be said for broader markets today.
