Caixin View: China’s Credit Is Bottoming Out, But Surge Won’t Last

*Positive credit and liquidity numbers suggest months of government attempts to spur lending to China’s cooling economy are having an effect

*A sustained surge in new credit is not expected anytime soon

China’s total social financing (TSF), a broad measure of credit and liquidity in the economy, grew by a net 4.64 trillion yuan ($684.93 billion) in January, the highest level according to available data going back to January 2002 and beating market expectations, according to data released last Friday by the central bank. TSF includes financing that exists outside the conventional banking system, such as initial public offerings, loans from trust companies and bond sales. The benchmark Shanghai Composite Index closed Monday up 2.68%, with the Shenzhen Component Index rising by 3.95%, likely in part due to a positive effect on sentiment, combined with a fairly positive end to recent U.S.-China trade talks. But we don’t think the new data give a strong signal that China’s credit growth is on its way up for the long term.

The positive numbers do show that months of government attempts to spur lending to China’s cooling economy, including a new monetary policy tool, the targeted medium-term lending facility, and plenty of vocal encouragement from policymakers for banks to lend more, are having an effect. Following the four cuts to banks’ reserve requirement ratio last year, the central bank lowered the ratio by 100 basis points in January, resulting in a net injection of around 800 billion yuan into the financial system. Here are some other highlights from the credit data:

·Most of the TSF growth was driven by bank loans — banks made 3.57 trillion yuan of new yuan loans in January, 881 billion yuan higher year-on-year.

·Outstanding M2, a broad measure of the money supply that covers all cash in circulation plus deposits, grew 8.4% year-on-year at the end of January, up from 8.1% growth a month earlier.

First, the TSF growth was not as outstanding as it first appears. Credit growth data is highly seasonal, and the start of the year almost always sees much higher numbers. January 2016 and 2017, for instance, also both saw then-record highs in absolute TSF growth. In addition, though TSF grew significantly in absolute terms this year, proportionally it only grew 10.39% year-on-year, marking just a four-month high. So while the data was encouraging, its significance should not be exaggerated.

A slide in M1 growth from 1.5% year-on-year in December to 0.4% in January was likely caused in part by Lunar New Year distortions, but it also indicates that businesses may be using much of the new credit to roll over existing debts, rather than create productive economic activity. In addition, of the 2.58 trillion yuan of new loans made in January to nonfinancial enterprises, only about 58% of the total was composed of medium-to long term loans. Longer term debts have lower interest payments and also allow more long-term investment. By comparison, in January 2018, about 77% of new loans to nonfinancial enterprises were medium or long-term, and for the whole of 2018, the proportion was about 70%. The relatively high proportion of shorter-term debt in the January data is therefore another reason to not overstate its impact on the real economy.

Finally, CEBM, a subsidiary of Caixin Insight Group, estimates that 2 trillion yuan worth of off-balance sheet assets, like trust loans and entrusted loans, are maturing in 2019. Due to continuing pressure on banks to cut down on financial risks, they are unlikely to be renewed. This means a large amount of credit will effectively be taken out of the economy. This will act as another dampener on overall credit growth this year.

After credit growth plummeted last fall, January’s data certainly indicates that the slew of supportive policies unveiled over the past few months are starting to have an effect. But given the caveats above, we’re not expecting a sustained surge in new credit anytime soon.

Calendar

Feb 22: National Bureau of Statistics releases January data for housing prices in 70 large and midsize cities