When one month ago China announced that it had created just Rmb 488 billion in total new credit as per its broadest credit aggregation metric, Total Social Financing, there was concern among the liquidity addicted community that the PBOC had again hit the brakes on the country’s rampant credit expansion. Those concerns were more than allayed, however, overnight, when the PBOC released its latest August credit data, which not only saw a surge in new Yuan bank loans, but a dramatic jump in TSF – the second highest since 203 – with indications that the shadow banking pipeline, in the form of Bankers Acceptances, which had been shut for most of 2016, is slowly reopening.
The main points from the report:
- August money and credit data were all above expectations. Mortgage loans continued to be strong: medium- to long-term new loans to the household sector were Rmb 529bn.
- Total social financing flows accelerated. In addition to the higher RMB loans, bank acceptance bills also contributed to stronger headline growth (Rmb -38 bn in August, vs Rmb -512 bn in July).
- On a broad basis, after adjusting for local government bond issuance, total financing flows were Rmb 2238 bn, much higher than the Rmb 809 bn in July.
Here are the highlights:
- New CNY loans: Rmb 949 bn in August (RMB loans to the real economy: Rmb 797 bn) vs.consensus: Rmb 750 bn.
- Total social financing (TSF, flow, before adding local government bond net issuance): Rmb 1470 bn in August vs. GSe: Rmb 1300 bn, consensus: Rmb 900 bn, July: Rmb 488 bn.
- M2: 11.4% yoy in August (17.7% SA ann mom) vs. GSe: 11.0% yoy, Bloomberg consensus: 10.5% yoy. July: 10.2% yoy (7.6% SA ann mom by GS).
And the details: adjusted TSF stock soared to Rmb 1.47 trillion exceeding by more than half a median estimate of CNY900 Bn. The figure was a whopping Rmb 1 trillion higher than July’s Rmb 488 Bn. The number rose 16.0% yoy in August, higher than 15.7% in July. The implied month-on-month growth was 18.2% SA ann mom, up from 14.0% in July. (There was Rmb 768 bn of local government bond net issuance in August compared with Rmb 322 bn of issuance in July according to WIND data.) Still, according to the PBOC, TSF stock growth (not adjusting for local government bond issuance) was 12.3% yoy in August, below the year-end target of 13%.
As can be seen in the chart below, “shadow banking”, typically represented by Banker Acceptances, declined by just CNY38 billion, the smallest monthly contraction since March. The series has soaked up nearly CNY2 trillion YTD, and the latest data suggests that China may be easing back from its crackdown on the local shadow banks.
The rebound in money and credit supply supported real economic activity growth in August, as observed in recent Factory and retail sales data. Sequential IP growth rebounded from a mere 2% in July to 6-7% trend level in August. The 18.2% mom sequential TSF growth was meaningfully higher than the 14.0% in July and the second highest reading since August 2013 (only June 2015 growth was comparable at 18.3% mom). Strong sequential real economic activity growth in August was also supported by faster government expenditure growth (August fiscal expenditure at 10.5%yoy, vs 0.3% yoy in July), strong industrial export delivery sequential growth (August export delivery 13%, vs 0.7% in July), and possibly technical factors (a larger number of working days and higher than usual temperatures which boosted items such as power consumption).
This rebound in broad money and credit supply came after the report of slowing money and credit growth amid slowing real economic activity growth in July which led to rising concerns about growth momentum. As a result there was likely an intentional stealth loosening which occurred in August. The stronger than expected activity data in August likely eased policy makers’ concerns about growth momentum but they appear to be highly vigilant on this, for good reasons:
- Export growth was exceptionally high in August given the current pace of external demand and is likely to moderate over the remainder of the year.
- Any beneficial effect of high temperatures on output data should disappear going into September as it is only during the hottest (July and August) and coldest months of the year that temperature has a meaningful impact on activity growth. At other times of the year when temperature is mild variations from the norm make little difference to activity growth.
- G20 related shutdowns, which were only lifted on 7th September, may weigh on industrial activity growth in early September. Although the shutdowns started in August, the reinforcement was probably more stringent in September as the main summit approached.
- Although calendar effects should theoretically be adjusted for in seasonal factors, there may be some residual bias and the effect will go the other way in September (from two more days in August 2016 vs 2015, to one fewer in September 2016).
However, without ongoing domestic policy support, growth could fade again. The State Council regular meeting last week appeared to signal that policy stance has turned more supportive (See China: State Council meeting sent out clear signal of another round of policy loosening, Sep 06, 2016). Recent open market operations by the PBOC since August led to some concerns in the market that the central bank is trying to tighten monetary policy. Today’s data and the State Council meeting should ease those concerns as the broad loosening bias of government becomes increasingly clear.
Finally, this is how Wall Street evaluated the number:
BERNSTEIN (Wei Hou)
- Aug. total social financing, or debt held by individuals and private companies, large beat was due to continuously strong issue of mortgages
- Corporate loans remained weak; lack of medium and long-term loan demand poses risk to economy in 2H
- Household medium-term, long-term loans formed 85% of new loans to non-financial private sector in Aug.
- Prefers big-4 SOE banks over mid-sized banks due to relatively stronger balance sheet
DAIWA (Leon Qi)
- New RMB loan growth continues to rely on households; Sees continued growth in mortgages from Sept. as banks lack other growth drivers
- Higher than expected social finance aggregate growth on shadow banking channels, equity financing
DBS (Shujin Chen)
- Long-term corporate loan decline reflects lower infrastructure project demand after prior strong months
- Strong loans are key for banks’ net interest income improvement
- Prefers banks that would recover earlier than peers, such as China Merchants Bank, Bank of Communications
GOLDMAN SACHS (Nan Li)
- Aug. total social financing driven by robust loan growth, corp. bond issuance and smaller decline in bank acceptances
- Incremental stimulus less likely due to earnings recovery even as credit conditions remain loose
- Corporate earnings recovery on better revenue growth and lower funding cost may stabilize banks NPLs
- Prefers large banks with high dividend yields and mid-caps with strong, improving retail focus