Capital Economics with the note that maps out the coming iron ore crash:
- Both bank lending and broad credit dropped off more sharply than most expected in April. Apart from during last year’s lockdown, loan growth hasn’t been this slow in nearly two decades.
- The net increases of both bank loans and aggregate financing (AFRE), the PBOC’s measure of broad credit, dropped back sharply relative to March. A decline was expected, but the outturn was weaker than most had forecast. There was a net RMB1,280bn increase in local currency loans (the Bloomberg median was RMB1,563bn and our forecast was RMB1,650bn), while AFRE saw a net increase of RMB1,850bn (both Bloomberg and CE: RMB2,250bn).
- These figures are highly seasonal, so the year-on-year change is a better guide to the underlying trend. On this basis, bank loan growth slowed from 12.6% y/y to 12.3%. (See Chart 1) It appears that the PBOC’s reported mandate to cap new lending for 2021 as a whole at the 2020 level is biting. All of last year’s pick-up in loan growth has been reversed and lending is now back on the long-run path of gradual deceleration. Indeed, apart from during the lockdown last year, the last time lending growth was so slow was in 2002. (See Chart 2)
- On the broader AFRE measure, credit growth slowed from 12.3% y/y to 11.7% due to a broad pullback in shadow credit and, in particular, slower issuance of corporate bonds. (See Chart 3)
- We’d been forecasting a deceleration in broad credit growth to 11.5% around this middle of this year. If anything, the latest figures suggest the slowdown is happening even faster. And we expect it to continue through the second half, to about 10.5% in December. If that happens, this will be a continued headwind to the economy over the next few quarters. (See Chart 4)