China: Another Credit Binge Will Not Cure The Economy
China's recently-released credit aggregate numbers were truly staggering. Total social financing (TSF, the country's broadest measure of money supply) surged a remarkable 94.1% month-on-month (m-o-m) to CNY1.57trn, shattering the market's expectations of CNY950bn by some distance. Put another way, China saw the equivalent of 2.8% of nominal GDP in net new credit injected into the economy in August. Another feature of the latest credit surge has been the dominance of non-traditional financing. Indeed, traditional yuan loans as a share of total loans remain near historical lows.
What Do These Numbers Tell Us?
The strong credit numbers, coupled with the broad reflationary trend across high-frequency macro data such as purchasing managers' indices, suggest that we are likely to see a relatively strong growth print in Q3 2013. Indeed, we alluded to such a scenario last month when Beijing announced a raft of new stimulus measures (see 'Our Take On The Latest Stimulus', Business Monitor Online, August 2013). However, we also see a number of other key factors that cannot be ignored.
Firstly, China remains as addicted as ever to debt as a means to generate economic growth. Total leverage in the economy is on course to hit 220% of GDP in 2013 from just 126% in 2008, underscoring the pace at which debt has been accumulated. With many corporates and local governments still facing serious cash crunches and negative profit outlooks, such aggressive credit expansion is unsustainable.
Secondly, the spike in alternative financing suggests that the positive impact on growth will be limited. The 2008-09 credit stimulus was largely directed through formal channels, with Chinese banks extending credit to companies and local governments for infrastructure projects. The opaque nature of credit expansion this time around is more worrisome. In fact, anecdotal evidence suggests that the recent spike in non-traditional lending has been largely driven by China's private sector, which has struggled to get access to bank loans. Such financing is likely to have been used to roll over existing obligations, rather than to build out productive capacity, in our view.
Thirdly, and in line with our view, the spike in informal credit calls into question Beijing's appetite for a serious crackdown on shadow banking. It was only six months ago that the new leadership announced a spate of measures designed to crack down on trust loans financed by 'wealth management products' (securitised retail products), but clearly financial institutions are managing to sidestep such regulations.
Sticking With Our Bearish 2014 Call
Despite the positive news flow of late, we have seen nothing to convince us that China's economy will witness a sustainable bounce in economic activity, and we continue to believe that real GDP growth will falter once more in 2014. While consensus has caught up with our 2013 growth assumption, there remains scope for a further de-rating of China's macroeconomic prospects next year. We are forecasting real economic growth of 6.7% versus a consensus mean of 7.4%.
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