China won’t stimulate this time

Via Vertical Group:

 Despite Mounting Signs of a Slowdown in China’s Economy, We Do Not Believe Big Gov. Stimulus Will Rescue Investors this Time. China’s total social financing (“TSF”), the broadest measure of new credit, was lower than necessary in Nov. That is, despite beating Cons. ests., and rising 105% from Oct, total credit growth in Nov, at ¥1.5tn, was -21% y/y (Ex. 1-2); and, more importantly, as discussed in our flash note last Thurs., based on our in-house measure of net liquidity (adjusting TSF for debt service), we observe that liquidity in China – as a percent of TTM GDP – fell to a record low in Nov (i.e., net liquidity/GDP is currently <1.0%; the last time it fell below 1.5%, Apr ’15, preceded acute weakness in China’s economy & commodity-linked equities) – Ex. 3-4. In other words, with monthly debt service at ~¥1.4tn, +71% from 3- yrs. ago, we est. that TSF has to grow by >¥2tn/mo. for 3-4 months before incremental credit can reach the real economy.

Yet, contrary to Cons., aside from a likely seasonal jump in Jan/Mar (i.e., since ’03, TSF in Jan + Mar has averaged 26% of the annual total), and in spite of mounting signs of an econ. slowdown (e.g., in Nov, industrial output YTD was +5.4% y/y [Cons: +5.9%], retail sales were +8.1% y/y [Cons: +8.8%], foreign direct investment in RMB terms YTD collapsed by a record -26% y/y [even w/ a 5% y/y FX tailwind], & infrastructure investment was +3.7% y/y [below the +8.9% avg. YTD] – Ex. 5- 8), we do not believe large-scale gov’t stimulus will rescue investor sentiment this time around. Why? It is a matter of control. Specifically, we contend that: