China’s shocking data has a message


The bizarre under reaction to China’s terrible data output yesterday rolls on, making no appearance in the Australian media today and, more to the point, triggering a global after party!

Just in case you missed it, here are the charts:


I know all of the arguments. A sudden stop in credit in China is combatable because the government owns the banks. It’s true. But the government does not own the shadow banking system quite so much. And that is where the real problem is:


Let’s be clear, such a shadow bank contraction is rare. One of this magnitude is unprecedented. In the midst of falling house prices and an increasingly intense shakeout among developers, it is alarming. Yet UBS sees it as a rogue number, via FTAlphaville:

China’s July credit data came in sharply weaker than expected. July new RMB lending declined to 385 billion from 1.1 trillion in June. More importantly, new total social financing (TSF) was only RMB 273 billion, led by the drop in new bank lending and a 400 billion shrinkage of bank bill acceptances. As a result, credit growth slowed visibly and our credit impulse plummeted (Figure 1).

Given recent signs of further policy easing and persistently low interbank rates, the market has been expecting additional monetary and credit support. Today’s credit data are therefore a negative surprise. However, we do not believe these data reflect a credit tightening by the PBC – as evidenced by recent policy intentions expressed by the Politburo and the central bank, as well as ample interbank liquidity and strong credit growth in June which surprised on the upside.

Some of the following factors may help partially explain July’s credit data surprise: 1) June’s exceptionally strong deposit and credit growth may have led to a bigger-than-usual seasonal drop in July; 2) Tougher shadow banking regulations have reduced the layers of intermediation which used to inflate credit and deposit numbers, often facilitated by bank acceptance bills; 3) Tougher regulation may have also led to more shadow banking activities being hidden in new ways that cannot be tracked by TSF (for example, asset management business of security companies); 4) Banks may have had to cut short-term lending to companies in light of July’s deposit decline, due both to the seasonal post-quarter-end decline and continued rise in wealth management products; and last but not the least, 5), demand for credit in the real economy may be weak, and some of which have already been satisfied in June.

Just as we cautioned against over-interpreting the government’s policy and monetary easing, especially regarding some market participants’ earlier read of PBC’s new pledged-supplementary-liquidity tool, we similarly caution against over reacting to July’s surprisingly weak credit data. We do not see these as evidence of credit tightening and expect August credit numbers to improve.

A few points. Interbank market rates have been rising for several months not falling and those 5 points are all evidence of credit tightening. That’s not necessarily bad. Tightening interbank markets could be reassuring to the extent that they suggest that that’s what the PBOC wants, so this is all part of the plan, as it were. But that is supposition. They could have tightened for any number of reasons.

It is point 5 that bugs me the most. I remain convinced that Chinese authorities will keep one foot on the brake and one on the accelerator to generate the structural adjustment that they need. But the one big risk is that credit demand gets away from them. If the residential real estate correction gets up a head of steam then credit demand will evaporate and no matter what authorities do it will not restart until prices have fallen enough to tempt new buyers. The proverbial “pushing on a string” as an asset market finds a lower equilibrium price. That would trigger a global shock.

At this point that remains a risk rather than a reality, albeit with a higher likelihood than yesterday. But there are other much more immediate and specific problems that this data poses for Australia. Nomura provides a real estate investment update in the same post:


Here again is the year-to-date real estate investment chart:


Last year real estate investment was 20% for the year. At it’s current rate of decline it will be half that this year. Real estate investment accounts for 15.6% of Chinese GDP before calculating spillovers so if we keep falling at the current rate we’ll be losing roughly half of 15.6% of Chinese GDP, and probably more like half of 20%. That’s approaching a 1% GDP hit.

That’s being offset in infrastructure and other stimulus to some extent but these are less commodity intensive than real estate construction so we can also expect increasing downwards pressure on construction related commodities.

That’s the clear message from yesterday’s data, whether you reckon it’s a rogue number or the harbinger of a worsening shakeout, sell bulk commodities.

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  1. There is a lot of talk about the RRR riding to the rescue but it is worth keeping in mind that one of the reasons the RRR rose as high as it did was that the government wished to slow credit growth.

    The objective was not to encourage shadow banking (or traditional banking as I prefer to call it) for reasons that have become apparent.

    Shadow or traditional banking has a bad habit of fraud – whereby they lend at call assets at term and use assets as security for multiple loans. Those port warehouse receipts are no different to the practices of the goldsmiths from where much banking practice developed.

    That shadow banking exploded when the govt tried to limit access to credit is an indication of just how hot the Chinese economy has become.

    Now that the govt is pouring a bucket of cold water on the excesses of the shadow banking era why would they rush into encouraging banks to lend money to the shadow banking customers.

    Some perhaps – the ‘good borrowers’ – and some lowering of the RRR might accommodate this – but the point of taking action on shadow banking is stop unproductive and speculative leverage.

    The government may not be able to engineer a perfect landing. Economies running on mania and leverage are like that.

    As we should have learnt by now.

    • migtronixMEMBER

      What’s wrong with lending at call an asset sitting on your books for a term? It’s the other way around that’s an issue!

      As for same asset multiple loans? Again what’s the issue if the leins are well defined?

      The problem is commercial banks pretending they are government because they both accidentally the same money

      • I agree – I needed a comma in there

        “…– whereby they lend at call assets, at term and where …”

        IF the liens are well defined but they are usually not. The problems of warehouse receipts in China are multiple competing claims issued over the same assets. All good until everyone seeks to take possession at the same time.

      • “…RRR cuts won’t change anything if credit demand is the problem…”

        Yes indeed.

        Every bankers nightmare.

        A collapse in demand for their product.

        The RBA know the feeling well – it is getting hard and harder to stuff the foie gras geese with the low interest rate feeding stick.

    • Sounds about right to me.
      One thing to remember is that China’s state run banking system is very inflexible with an extremely poor record wrt investment banking (outside the RE sector). As the shadow banking system contracts many businesses are left with absolutely no sources of credit. This is exactly what has happened in previous tightenings.
      In Chinese manufacturing this has the effect of debts piling up at the weakest points in the system which is to say those businesses with the least leverage are getting paid last. They dont have deep pockets so they shut down their operations quickly and often leave lots of wages unpaid.
      The real tell tale sign, that all is not well, is migrant workers heading back to their villages. This trend was so strong back in Oct 2008 that it scared the PBOC into action and in the process created Australia’s resource re-boom.

      From what I hear migrant workers are slowly returning, its nothing dramatic at the moment but the dysfunction they return with is already starting to disrupt village harmony. Its one thing to come home once per year with a full “Hong bao” to spend and distribute, its a totally different situation to return with empty pockets and broken dreams.

      • ChinaBob … that is an excellent point you mention about the migrant workers.

        Lets hope journalists such as Esther Fung of the Wall Street Journal and others are investigating this.

        It seems clear to me that China’s bubble has burst. The development / construction and allied numbers are just so stretched.

        The Authorities cannot afford to prop up their SOEs and Local Government AND the housing bubble as well. Indeed … there has been no indication they intend propping up the housing bubble in any meaningful way.

  2. I think that the money markets today truly believe that sentiment is everything. Don’t worry be happy….

    Yeah right.

  3. Its a lose lose situation? We would all be protesting if the SB credit was blowing out again and are now concerned its declining. Personally this is a blip on the impact of new regulations, not a reduction in credit appetite. You are forgetting that these are mainly state owned banks with a highly invasive regulator who has clamoed down hard on the interbank / SB market through a raft of new regulation Yes the CBRC is concerned with SB hence has put in these controls. Its like APRA telling the Big 4 they can no longer lend at LvR > 90% – what do you think would happen?

  4. Should I care? A Chinese banking implosion won’t touch my dollars in New York.

    They knew the risks when they bought the tickets. I say let them crash.

    Our humanitarian response should be to air drop pitch forks.

  5. HnH,

    Do you mean “a 1% GDP hit” or is it a typo?

    Half of between 15.6% and 20% looks nearly 10%

  6. China Home Sales Fall … Esther Fung … Wall Street Journal (google search title if blocked)

    SHANGHAI—Housing sales in China in the first seven months of the year fell 10.5% to 2.98 trillion yuan ($484 billion), signaling that property-loosening measures rolled out by about 30 local governments haven’t yet made a meaningful impact.

    Sales were 2.56 trillion yuan in the first half of the year, down 9.2% from the same period of 2013, according to data released by the National Bureau of Statistics Wednesday.

    July is typically a seasonally slower month for housing sales and analysts said they are awaiting sales data in August and September for signs a turnaround is in the works, but the continued fall in sales remains a cloud on China’s economic prospects.

    Consumers are staying on the sidelines on expectations for further falls in prices, property agents said.

    Housing sales in July fell 17.9% on a year-over-year basis and 28.2% from June, according to calculations by The Wall Street Journal from data issued by the National Bureau of Statistics. The bureau doesn’t issue data for individual months.

    Some economists were surprised by the weakened sales momentum, especially since more local governments made it easier for home buyers to purchase their second or subsequent homes … read more … hyperlink above …

  7. just about the only thing them Undereducated Banking Students did not mention in their 5 pillar nonsence essay,
    seasonality. It basically gives a month of another wild guess’ forthcoming.

    ofcourse sentiment is the only playing field avalable today, all analysts is confused on an equal footing so whats left
    when you cannot trust their numbers let alone their conclusions when they are consistantly wrong ?

    the good thing is though that they are being annilhilated at a record pace still so one day it will reverse.