Can China's lending spree stave off slowdown?

China’s new loan and aggregate financing hit a record high in January. This was partly due to seasonal lending patterns, but primarily due to a more accommodative monetary policy stance. Slowing growth momentum and downside risks will warrant continued monetary support as well as improving monetary policy transmission mechanisms and targeted fiscal support.

• The 4.64 trillion yuan January increase in aggregate social financing is equivalent to approximately 5% of China’s GDP, and up markedly from 3.08trn yuan in January 2018.

• New yuan loans in January also surged to an all-time high, reaching 3.23trn yuan, up 13.4% from 2.90trn yuan a year earlier.

• The increase in new loan growth is partially driven by the financial deleveraging campaign-related January 2018 reduction. There is also a seasonal effect included as the Chinese New Year holiday fell early this year, causing banks to loan more earlier in the year, but the push from Beijing to drive growth via credit cannot be ignored.

China is hedging its bets and ramping up credit growth as a trade deal alone can’t save the turning cycle. But in the event that the concessions the Beijing is prepared to offer are not enough to seal a deal with US president Donald Trump, policymakers are making moves to counter the economic slowdown and combat downward pressure.

Slowing growth momentum will continue to drag on the equity market as incoming data deteriorate, but credit growth coupled with trade optimism are positive at the margin for Chinese stocks. We remain cautious as to the longevity of this positive momentum, however. China must bring enough concessions  to the table (unlikely given the 90 day timeline ) to satisfy trade hawks or President Trump risks a backlash.

Markets are baking in a lot of optimism surrounding the trade talks, but there is presently no deal and the potential extension of negotiations being bandied about by Trump leaves the market vulnerable to geopolitical dealings and negative headlines, where optimism can flip just as quickly to pessimism.

There is an sense of potential overheating at the moment as the market remains complacent on the impact of global growth deterioration and the flow-through to corporate earnings. The fumes of policy easing, central bank U-turns and trade optimism cannot fuel the market forever.

The end of deleveraging?

There have been no official announcements from policy makers (and there likely won’t be) but the deleveraging drive that began after the 19th Communist party congress in late October 2017 seems to have fallen by the wayside. The trade war and slowing growth momentum appear to have derailed deleveraging ambitions. The shadow finance market stopped dwindling for the first time since February last year. Undiscounted acceptance bill issuance rose by 379bn yuan and trust loans rose by 34.5bn yuan. 

Support for private firms

Banks are now being urged to more readily support private firms. January’s corporate bond issuance figures show that only 6.4% of issuance was accounted for by private companies, making state-owned companies the prime benefactor of the uptick.

A joint circular by the Communist Party Central Committee and the State Council is now urging regulators and lenders to step up the financial support for smaller businesses and private firms:

“Financial regulators must enhance supervision, while fiscal authorities also must make full use of fiscal and tax policy and play its role as investor of state-owned financial institutions [...] all the provincial governments also need to take their responsibilities and take relevant measures to lift the financing support for private firms.”

The China Banking and Insurance Regulatory Commission has also been advised to be more tolerant of non-performing loans so that banks will be more cooperative in granting loans to private borrowers. 

The motivation to support the private sector likely comes from the desire to maintain social stability and jobs growth; the private sector contributes more than 80% of China’s employment and accounts for the majority of new jobs created each year. The revival of credit growth will take several more months to feed through to the real economy. Also, these new stimulus measures fall on a weaker economy saturated with debt where the marginal impact of such measures will be less than in previous episodes of stimulus.

Recent Chinese data suggest the economy has not yet bottomed out, and we could see data deteriorating and a deeper slowdown before easing policies take effect. There is typically a lag of around nine months between credit growth and real economic growth. 

We did see stronger-than-expected January trade data but it is still too early to sound the all-clear. The data were likely impacted by more front-running before the potential tariff increase on March 1 and the pulling forward of orders before the Lunar New Year (which came early this year, boosting exports).

The import numbers would also have been affected by the Lunar New Year, so the fact that they remained negative is concerning and reflects weak domestic demand. The Lunar New Year always distorts Q1 data and it is unlikely that we will get a clear picture until we can compile the January, February and March data (February's data are likely to be distorted by renegotiations of annual contracts after the New Year).

Also note that South Korea and Taiwan, which are not affected by the Lunar New Year holiday, have continued to print disappointingly weak export numbers that suggest there is some disruption in the Chinese data. January's figures also showed that producer price inflation is on the verge of contraction at 0.1%, which is a blow to industrial profits as the two are highly correlated.

Ultimately, credit growth and easing policies may have turned a corner but the effects are not yet being felt in the real economy and Chinese growth may not have bottomed out just yet.