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After January Scramble, Chinese Lending Collapses

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After January's record-smashing CNY3.4 trillion (half a trillion dollars!) surge in aggregate credit expansion in China, the post-lunar-new-year hangover hit hard in February as credit growth tumbled 77% from Janaury's level to just CNY780 ($112bn). This is the weakest February loan growth since 2011. Drastically missing expectations, and following authorities comments on the need to "monitor" excess credit growth, all categories of total social finance registered a sharp drop.


After a huge spike in loan growth in January (which appeared to have absolutely no marginally positive impact on any real economic data)...






China total loan growth collapses....






As it appears massive amounts of loan issuance were pulled forward (before the new year), prompting the People’s Bank of China to crack down on excess lending at some banks always making the slump in February a possibility. But as Bloomberg notes, looking at the data for the first two months of the year together, credit growth remains on a rapid upward trend, and the government is targeting a faster credit expansion for 2016 as a whole. Industrial output data for January and February, slated for release Saturday, will be critical in determining the immediate policy outlook.


In the details of today’s data release, all categories of total social finance registered a sharp drop.
Yuan bank loans fell to 810 billion yuan in February from 2.5 trillion yuan in January. Corporate bond issuance fell to 86 billion yuan from 454 billion yuan. Bankers acceptances dropped 370 billion yuan, after registering a 130 billion-yuan increase in January. Trust loans and entrusted loans, the other major "shadow banking" categories, fell from January’s level but remained in positive territory.


Goldman Sachs explains...


February credit data was weak.
Part of the fall in the level of credit supply was because of seasonality -- February credit supply is always substantially lower than that in January. However, normal seasonality certainly cannot explain the magnitude of the fall, as the level of RMB loans last February was only around Rmb 500 bn less than that in January. Another perspective on seasonality is to compare this February with last. Since the outstanding loan growth rate is in the teens, the newly increased amount is normally larger than that of the same month the prior year--but this February's level is clearly below last year's, pointing to factors other than seasonality as playing an important role. TSF flows were weak, although there was around RMB 167 bn net issuance in local government bonds in February.
After adjusting for local government bonds, TSF growth was still relatively weak, with sequential (month-over-month) growth at the lowest level since mid 2015
. Among the components under TSF, bank acceptance bills declined RMB 371 bn, which likely reflected the impact from discount bill frauds that surfaced in late January.




However, sequential M2 growth accelerated in February.
Fiscal policy stance was supportive, although not quite as supportive as February last year,
and FX flows likely became less of a drag.




The weakness in February credit data was policy driven, in our view, and should be viewed in light of exceedingly strong January data.
Although the government likely wanted to loosen policy in light of renewed downward pressures on growth, which are due in large part to weak exports, the actual amount of loosening in January may have breached policymakers’ comfort zone (consistent with reports on PBOC guidance to slow lending in mid January).




Concerns about rising CPI inflation, leverage and public perception remain key constraints on the extent of monetary policy loosening.
Although doves tend to dismiss the rise in CPI inflation, which has been mostly food driven, as driven by temporary factors especially adverse weather conditions, hawks may view it differently as the result of the very loose monetary conditions in January. Historically, China's CPI inflation is almost always mainly food driven and its behavior is very pro-cyclical, contrary to that in many developed economies. As food prices continue to be high in March, CPI is likely to remain at above 2% in March, in our opinion, limiting the extent of short-term policy loosening.
There also is a rising number of media comments on policy stance questioning whether the high credit growth in January is turning out to be another Rmb 4 trillion stimulus, which may make the case for loosening more difficult for policymakers who are in favor of this.




Strong January money and credit data led to overly high market expectations about future liquidity supply, which likely gave domestic equity market and commodities market a boost recently.
Today's downside surprise may raise questions about whether the government still intends to loosen. Our view is it still does, just not as aggressively as it appeared after the release of January data. The combined level of liquidity supply in the first two months of the year was still around RMB 700 bn, higher than during the same period of last year, which should support domestic demand growth, especially fixed asset investment, and partially offset the weakness in external demand. While the problem of “policy laziness” (a phrase coined by PM Li to describe the lack of action by officials tasked with implementing stimulus) certainly has not been eliminated, the severity likely has lessened amid heightened administrative pressures from the leadership. Aggregate demand growth on the other hand likely weakened from the high level reached in November and December (based on IP sequential growth).
As such, we think reaching the annual GDP growth target of 6.5-7.0% will be a challenging task and will require continued policy support, including monetary policy.


What is potentially most troubling is that despite all this yuuge issuance and declining credit quality, yields on China corporate bonds continue to compress in the biggest bubble that noone is talking about...






And as Bloomberg concludes, the signals from China’s policy makers remain somewhat confused. Ahead of the National People’s Congress, the PBOC flagged a shift to a "slight easing bias" in monetary policy. In the last few days they have appeared to try to row that back, saying the "prudent" policy stance remains essentially unchanged. That said, a target for 13% growth in M2 in 2016, up from 12% in 2015, and a 13% target for expanding aggregate finance, suggests the government is preparing to continue the credit stimulus. A 13% expansion in aggregate finance implies 17.9 trillion yuan in new lending and equity issuance in 2016, up from 15.3 trillion yuan in 2015.


Which is notable since M1 growth and M2 growth missed expectations significantly in February (M1 +17.4% vs +18.09% exp and M2 +13.3% vs 13.7% exp.)




Charts: Bloomberg














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