Pantheon wraps new Chinese credit data.
In one line: The liquidity trap hasn’t eased yet
- M2 growth slowed slightly to 12.1% y/y in September, from 12.2% in August. Consensus was 12.1%
- M1 growth accelerated to 6.4% y/y in September, from 6.1% in August. Consensus was 6.4%.
- Total social financing rose to RMB 3,530B in September, from RMB 2,432Bin August. Consensus was RMB 2,750B.
The slight increase in aggregate financing growth, to 10.6% y/y, from 10.5% in August, was led by growth in bank lending and shadow financing, particularly entrusted loans. We think this reflects the rollout of property bailout funds, with banks lending to SOEs and LGFVs, and SOEs making entrusted loans in turn, with the aim of restarting stalled property projects. We suspect credit demand amongst corporates remained muted beyond this. Infrastructure and other key national investment projects are also likely to receive some of the 1.35trn yuan in new long-term corporate loans in September, the highest monthly figure since June.
Household net new loans of 650.3bn yuan in September was the third largest figure this year, after the short-lived reopening boost in June and March’s seasonally strong number, but still represented a further slowdown in lending growth, to 7.2% y/y, from 7.4% in August. The PBOC has not yet provided the breakdown for short-term and long-term household loans, but reports of increased home sales, especially in the existing home market, suggest we should see some m/m improvement in long term loans.
Government bond issuance rose m/m, thanks to the additional tranche of local government special bond quota. On September 7 the State Council announced that local governments would be allowed to issue about 500bn yuan of special bond quota unused since 2019. This followed local governments having issued the 2022 annual special bond quota for project investment of 3.45trn yuan. We expect the majority of the funds raised to go to infrastructure projects, but local governments have often proved sluggish this year. Government bond issuance again slowed y/y, to 16.9% in September, from 17.6%, showing how difficult it is to provide an acceleration at this point.
The gap between M2 growth of 12.1% y/y and aggregate financing growth of 10.6% y/y, though closing slightly, remained considerable in September. This indicates concern over the economic outlook among households and private sector businesses, and highlights China’s ongoing liquidity trap. The acceleration of M1 growth is encouraging, but again it remains well below the growth rate of M2. We are still waiting for a breakdown of deposits to see which sectors drove this increase, but we suspect it reflects the arrival of local government spending in corporate accounts. Beyond infrastructure support, China’s economy still faces a number of challenges. Private businesses, depending on their sector, are exposed to slowing exports, the repeated disruptions of lockdowns under dynamic zero covid policy, or a struggling property sector. We expect these headwinds to continue until early 2023 at least.
This means the liquidity trap will remain in place. Credit demand will largely depend on fiscally funded infrastructure and key project investment. The liquidity trap renders broad policy rate cuts ineffective to revive loan demand. Monetary policy is relegated to accommodating the fiscal expansion. Moreover, the strong dollar index and PBOC’s desire to manage downward pressure on the renminbi is another reason not to cut rates.
