Year to date new credit is still hovering around -16% and has been for six months:
The rolling annual mountain is headed lower:
And broad credit is slip-sliding away at 10.3%:
In short, at the current rate, China will issue $1.2tr less new credit this year, much of it in the construction sectors.
Wall Street is trying to put a positive spin on it. Goldman is its usual drunkenly bullish self:
1. August TSF flow came in above expectations, although RMB loans surprised to the downside. Sequential growth of TSF stock improved to 10.6% mom annualized sa inAugust from 8.9% in July, and overall RMB loans growth picked up slightly to 9.1%month-over-month annualized, from 8.8% in July. M2 year-on-year growth was slightly lower than market expectations and slowed from 8.3% yoy in July to 8.2%yoy in August.
2. Among major TSF components, corporate and government bond net issuance, the major contributors to August TSF, picked up sharply. RMB loans increased slightly mainly on an acceleration in corporate mid-to-long term loans. After our adjustment for seasonality, corporate mid-to-long term loan growth picked up to 13.5% mom annualized from 11.4% in July, although corporate bill financing contracted sequentially and short-term corporate loan growth remained low. On loans to households, short-term loan growth remained slow at 4.2% mom annualized, while household mid-to-long term loan growth accelerated marginally to 9.8% mom annualized (vs. 9.0% in July). The decline in trust and entrust loans narrowed slightly in August, although bank acceptance bills remained largely muted after seasonal adjustment.
3. PBOC held a meeting with large commercial banks emphasizing the need to maintain stable credit growth, which likely helped with an acceleration of loan extensions during the last week of August, and we think the impact could be more visible in September. While we do not expect major policy easing on property and LGFVs regulations, some marginal relaxation in terms of implementation (e.g. PBOC’s guidance on acceleration of mortgage lending) would probably help with a rebound in credit growth. We continue to expect one more RRR cut later this year, and expect government bond net issuance to increase in the next few months which would support overall TSF growth.
4. In light of the better-than-expected export and total social financing data in August, we revise up our forecast for August Industrial Production from 5.8% yoy to 6.0% you. This would imply a modest rebound of +5.7% mom annualized, vs -28.8% in July.
Let’s not forget that Goldman told everybody in June that China didn’t matter to iron ore anymore and to go long.
Morgan Stanley is excited too:
Outlook–broad credit growth to bottom in September: We maintain our view that broad credit growth could bottom in September and rebound modestly in 4Q on the back of a low base and possible acceleration of govt. bond issuance (central+local govt.bonds)–there are Rmb3.7trn remaining quota for Sept.-Dec.(vs.Rmb2.7trn for the same period last year), which suggest a monthly net issuance of~Rmb900bn in the coming months. In the NDRC press conference on Wednesday, policymakers also pledged to ramp up preparation work for infrastructure projects related to local govt. special bonds for the rest of this year and 1H22. In our view, this means policymakers will likely push for faster local govt bond issuance in the coming months and front-load next-year’s govt. bond quota in 1H22, to arrest downside risks to growth.
Some others are predicting the imminent turn in the credit impulse, which is true, but there is world of difference between rising to zero on base effects and turning positive on stimulus.
Sometimes, economists just need to look out the window. The great white hope of local government borrowing has been pushed by policymakers since May yet borrowing has remained subdued:
So far, there has been NO ramp-up. Indeed, it has gotten worse and there is no reason to expect it to change much from here. Nomura put it best:
The upside for infrastructure investment appeared limited
The funding of infrastructure investment is derived mainly from three sources: fiscal expenditure, government bond issuance and local government revenues from land sales. With slower-than-usual fiscal expenditure and government bond issuance, annualized 2y-o-2y growth in infrastructure investment remained mediocre over the first seven months of this year at 2.7%, mainly supported by still-strong local government revenue from land sales (with annualized 2y-o-2y growth of 12.8% over the same period). As we expect Beijing to fully tap the remaining RMB4.3trn of its net bond financing quota for the final five months of this year and fiscal expenditure to speed up in coming months to counter the expected slowdown, infrastructure investment may increase in coming months. However, as we expect property market conditions to worsen notably, a likely slump in local government revenue from land sales suggests the potential upside for infrastructure investment is likely to be limited. In fact, the sharp slowdown in volume sales of capital durable goods in recent months, including excavators (Figure 20) and heavy-duty trucks, also bodes poorly for infrastructure investment in H2.
This is the problem of having an inverted balance sheet. Everything is going up all at once. Or everything is going down all at once. Right now it is the latter.
RRR and interest rate cuts will be necessary before long, triggering a lower CNY and crisis in EMs, commodities and broader markets.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
