HSBC with the note:
Slower total social financing (TSF) growth, mainly due to a higher base last year, has likely led to tightened monetary conditions; but the structure of lending is improving with still robust mid-and long-term lending to support the real economy. We expect outstanding RMB lending to stay steady at 12.3% y-o-y in May. Although tightened regulations on the property market are likely to keep dampening household demand for lending, corporate demand especially for mid-and long-term lending has likely remained robust on the back of improved business sentiment and ongoing recovery of both domestic and global demand. Total social financing growth is expected to decelerate to 11.1% in May from 11.7%y-o-y in April, mainly out of a growing base last year (TSF growth rose from 12.0% in April to12.5% in May 2020). Apart from slower loan growth relative to the same time last year, bond issuance has also shrunk. According to Wind, as of 27 May, net corporate bond issuance was negative RMB205bn while government bond issuance increased RMB779bn, significantly lower than in May 2020 (RMB288bn and RMB1136bn respectively). The HSBC MCI likely showed significant tightening in May due primarily to slower TSF growth as well as a faster increase in inflation indices which contributed to a larger drop in real credit growth (Chart 1). The exchange rate appreciated slightly, which also contributed to a larger drag on the MCI in May.
That said, real rates were lower as both the nominal rate, the DR007, edged lower and inflation picked up, which helped to offset some of the drag from slower TSF growth. Fixed asset investment (FAI) year-to-date growth is likely to slow to around 17.5% in May (from19.9% in April), with the two-year CAGR pacing up to 4.9% in May (from 3.9% in April). The pick up is likely to mainly come from manufacturing and infrastructure, with property investment expected to slow down a touch. Manufacturing investment is expected to continue a steady recovery, with monthly y-o-y growth picking up pace to around 5.2% in May (from 3.4% in April), supported by the fast recovery of profits and high capacity utilization rates. The government’s emphasis on the manufacturing sector and on industrial upgrading should support a longer-lasting manufacturing investment upswing cycle. Infrastructure investment,in addition, has likely picked up pace too. Government bond issuance hiked up to RMB778.5bn this month (as of 27thMay), after staying low for the first four months, which should offer more support to infrastructure investment in the near term. Property investment, on the other hand, is expected to gradually lose steam. Land purchase investment, which paced up in April, will likely slow, as land supply growth has been on a downward trend since 2H20. Tightened macroprudential rules will also dampen housing purchases, dragging down investment on construction and installation. According to Wind, the mortgage rate for first home purchases in Guangzhou has picked up from 4.90% in January to 5.35% in May, while in Shenzhen, this has moved up from 4.98% in April to 5.03% in May. In fact, April monetary data already indicated softer lending demand for home purchases. We expect property investment to gradually cool down under the tighter policy stance on real estate.
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Some better and worse news there. Local government borrowing has lifted in May to be only down 31% versus -80% over the first four months. As I’ve mentioned before, there is plenty of headroom in local government quotas to lift borrowing from those collapsed levels.
That said, it is still down heavily so the Chinese infrastructure air pocket is still expanding.
This less auspicious news is that I expect the property develeraging to go on as well. Especially directly targeting big developer balance sheets.
If HSBC is right about TSF for May, and we’ve got to take such estimates with a grain of salt, then the Chinese credit impulse will get hammered again.
Nothing here makes me change my bearish outlook for iron ore.