China released September credit last night and needless to say it undershot, “surprising” apparently everybody but MB. Total new yuan loans were 3.03tr yuan with banks making up 1.66tr of that:
Year on year growth fell 16% and the 3MMA dropped further to -23%:
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M2 was stable at 8.3%
The rolling annual mountain continues to roll off hard:
Year to date new credit remains down around 16%, around $1.3tr less than last year:
The stock of broad credit growth dropped to 10%:
There is nothing here but more slowing growth. Especially for construction with no apparent rebound in infrastructure funding nor mortgages.
Of course, Chinese junk spreads kept marching higher:
Or, put another way, kept losing value. Shimmy, shimmy, whoosh:
Bloomie takes a shot at when it will end:
…no country can deleverage in a deflationary environment. That’s Fixed Income 101. In the case of developers, their ability to service debt naturally improves if they can charge higher prices. That means home prices must rise over time. But this year, various levels of the government actually rolled out as many as 400 measures to cool prices in the red-hot housing market.
…The cooling measures, ranging from rationing to price control, make the picture even uglier. During October’s Golden Week holiday, residential home sales slumped year-on-year in the country’s medium-sized cities — those in tier 2 like Wuhan (-55%) and Suzhou (-45%) — and smaller ones — in tier-3 like the Guangdong province manufacturing hub of Dongguan (-53%).
Deflation can be stubborn. Once Chinese households expect a broad-based slowdown, they won’t head into the market to buy property. They will wait instead. That, in turn, forces developers to cut prices — and the entire market spirals down. How then can Beijing expect its indebted developers to deleverage at all?
…You can expect Beijing to step back from harsh tightening measures when an ugly set of home prices shows up in public. Or if Evergande starts a deflationary fire sale of its projects in some of China’s medium and small cities.
Yes and no. It’s quite possible to deleverage amid deflation if you’re aggressive enough. A giant debt-for-equity swap in distressed developers would do it. That’s what’s coming to foreign creditors.
And, if houses are for living in not speculating on, then hammering household inflation expectations for a decent period is also a useful downpayment on future deleveraging.
As well, if you’re offsetting your asset market deflation with a boom in your external sector then the overall economy is deleveraging, or disleveraging, as we like to say at MB.
Then there is the energy crisis. If China relents in property now then commodity prices will go berzerk and it will derail that external boom.
My base case is that China is not going to relent yet and when it does it will not be esepcially exciting. Yesterday’s news that a new anti-corruption drive will sweep the policy banks stands in stark contrast to any effort to limit the developer shakeout. And consider the context:
- With an external boom, the timing is right in macro terms.
- With urbanisation overshot, the timing is right in microeconomic terms.
- With the rhetorical umbrella of “common prosperity”, domestic politics is contained.
- With Cold War 2.0 dramatically accelerated by COVID, the geopolitics of commodity supply chains must be addressed (that is reduced). Underlined by the energy crisis.
It is now or never for China to break its runaway property ponzi. Beijing knows that it will eventually collapse under its own weight and deliver a regime-threatening shock.
That means falling new home prices for a while. Three red lines held in place. Ring-fencing of dozens of developer bankruptcies.
There will be supports as growth overshoots to the downside. Failed attempts to boost infrastructure. RRR and rate cuts. A falling CNY. But growth is going to crash anyway.
Eventually, that is what will end it. After the carnage is exported as a massive deflation shock via commodities in 2022.
Even then, I expect the rebound to be muted for property.