Credit Impulse Update: Is China's deleveraging delayed?

Christopher Dembik

Head of Macro Analysis

Since the latter half of 2016, China has gradually moved towards a tightening stance aimed at pushing lower mortgage loans and curbing shadow banking and wealth management products. In early 2017, credit impulse reached its lowest level since 2010 at minus 4.5% of GDP. However, credit restriction is not a one-way stream. In a surprising move on April 17, the Peoples Bank of China cut the reserve ratio in order to ease conditions for businesses and individuals.

Now that contraction in China credit impulse is being felt at the worldwide level (global PMIs are falling apart and early signs of recession are popping up in the US), China is doing what it has always done in case of slowdown: it is stepping in in order to re-stimulate the economy and push credit impulse back in positive territory. China credit impulse is still in contraction, running at minus 2.1% of GDP, but it is slowly rising from its lowest point since 2010 and it might be back above zero sooner than we think if the Chinese authorities consider it is time to further support the economy.

Enlarge

In a highly leveraged economy like China, credit is a key determinant of growth and any credit restriction automatically translates into lower economic activity. Based on recent years, credit impulse and the China Economic Surprise index tend to evolve in the same direction. However, this positive correlation is not always systematic, as is currently the case in the graph below. Such a divergence, if it persists, can be interpreted as a sign of a rise in credit in the non-banking sector, which is not taken into account in our in-house credit impulse indicator.

Enlarge

Among all economic sectors, one of the most vulnerable to tighter credit conditions is the real estate sector. China credit impulse leads house prices by nine months, resulting in lower prices at the national, as we can see below. Real estate deleveraging does not affect all real estate segments equally. The sharpest decline can be noticed in tier 1 cities where prices have dropped into negative territory by percentage change at the beginning of the year whereas house prices in tier two and three cities have only experienced a moderate slowdown. However, this trend is likely to be short-lived since house prices are set for a recovery into 2019 as a consequence of the recent de facto easing by the PBoC and rising credit impulse.

Enlarge

The slowdown in credit monitored by the authorities has been noticeable in banking data over the past years. From mid-2016 until recently, year-on-year loans to non-banking financial institutions were in contraction but the last metric is slightly back in positive territory. It is too early to call for reversal of monetary policy stance in China but, along with the rising credit impulse and the expected recovery in house prices, it seems that deleveraging has been delayed in order to give economy a push. The question that now arises, but that cannot be answered with certainty at this stage, is whether the recent PBoC decision is a single “one-shot” measure or is it the first step of a new easing stance in order to stop an economic slowdown that is certainly underestimated by the market. 

Enlarge

Back to basics, it is safe to say that the leverage process appears to be moderately slowing down. Corporate debt as a % of GDP has decreased from a peak at 167% in Q2 2016 to 162.5% in Q3 2017, mostly as a result of an increasing number of bankruptcies, but public debt and household debt are still piling up at a very steady pace. 

Enlarge

As long as that credit, understood as total social financing (which is the wider measure of credit in the economy since it includes alternative financing), increases faster than nominal GDP growth, there won’t be real deleveraging of the Chinese economy. As shown by the graph below, China is at a crossroads: TSF growth and nominal GDP growth are almost evolving at the same  pace (around 10% YoY). However, considering the ongoing global slowdown and the risk of a US recession in 2019/20, it is unlikely that credit inflow in the economy will go down significantly in the medium term. Once again, China needs to save the global economy, as in 2009/10, at the expense of its own economy and deleveraging.

Enlarge

You can access both of our platforms from a single Saxo account.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.