China’s July credit numbers were out and show ongoing strength with Total Social Financing at $1.22tr yuan and bank lending only 826bn of that:
Shadow banking rebounded after a few months of downtrend:
Year on year financing jumped after a weak July 2016:
The rolling annual continues to lift:
But M2 to fall:
A mixed bag to be sure but overall firm enough to suggest only a slow slowing in growth through H2.
But to get the real picture we need to look at wider credit and the texture, via Capital Economics:
New lending declined in July, masking an uptick in underlying credit growth. We doubt this will translate to a sustained pick-up, however, since efforts to slow the build-up of debt mean that market rates should remain elevated in coming months.
Medium and long-term bank lending to households, a proxy for mortgages, continued to slow – a sign that property demand is cooling. (See Chart 1.) But this was more than offset by more rapid bank lending to firms. (See Chart 2.)
Meanwhile, growth in corporate bonds rose for the first time since July 2016, most likely in response to the recent declines in bond yields. Issuance of government bonds – which are not included in the TSF figures – also picked up in July. (See Chart 3.) After adding in government bonds, broad credit growth accelerated from a 20-month low of 14.3% y/y in June to 15.0% last month. (See Chart 4.)
Stepping back, the big picture is that broad credit growth has been on a downward trajectory recently. Looking ahead, we think the pick-up of credit growth last month is more likely a blip rather than the start of a new trend. While we think the PBOC is now done tightening monetary policy, we expect market rates to remain elevated enough to keep credit growth slowing.
Mortgages are the key. As property cools so will local government bonds. Both will steadily slow the construction pulse. I think we can expect ongoing fiscal support for infrastructure as an offset.
The IMF warned last night, via FT:
China’s economy will grow faster than expected over the next three years because of the government’s reluctance to rein in “dangerous” levels of debt, the International Monetary Fund warned on Tuesday. In an annual review of the world’s second-largest economy, IMF staff said China’s annual economic growth would average 6.4 per cent in 2018-20, compared with a previous estimate of 6 per cent.
The IMF is also predicting that the Chinese economy will expand 6.7 per cent this year, up from its earlier forecast of 6.2 per cent growth. The Chinese government, which pledged to double the size of the economy between 2010 and 2020, has tolerated a rapid run-up in debt in order to meet its target.
“The [Chinese] authorities will do what it takes to attain the 2020 GDP target,” the IMF said. As a result, the IMF now expects China’s non-financial sector debt to exceed 290 per cent of GDP by 2022, compared with 235 per cent last year. The fund had previously estimated that debt levels would stabilise at 270 per cent of GDP over the next five years.
“International experience suggests that China’s current credit trajectory is dangerous with increasing risks of a disruptive adjustment,” the IMF said in the strongly worded report.
That looks more like the IMF ringing the bell at the top to me. I don’t expect Chinese credit and growth to suddenly crash but another round of reform next year appears more probable than not and an ongoing growth glide slope towards 4% in 2020 is my base case.