The good news is the gears that keep China’s economy turning were well-oiled in January as credit expanded to an all-time high. The bad news is that such rapid growth in lending has revived worries about the overall health of China’s banking sector.
New loans in January hit RMB1.32 trillion (US$217.6 billion), a four-year high. Total social financing, or TSF, China’s broadest measure of credit growth, reached a new record of RMB2.58 trillion, far ahead of the estimate of RMB1.9 trillion in a Bloomberg survey.
The figures are somewhat surprising given the People’s Bank of China’s (PBOC) tightened stance on liquidity. Since last June, the central bank has signaled that it won’t allow runaway credit growth, especially in the face of heightened off-balance-sheet lending.
Markets shouldn’t react with alarm to the surge in credit growth. In the first month of the year new loans are usually high. Banks have just received new loan quotas and have backlogs of loan applications from the year before. Many institutions will “front load” their loans, or loan as much as they can early on with the hope of generating more income on interest. The jump in lending a year ago was similar, although not quite as strong as last month.
The data give some cause for worry, too. The percentage of new loans was higher than off-balance-sheet lending, unlike in December. That means the ratio of lending that was being channeled into the shadow banking sector was lower. Yet, off-balance-sheet lending hit RMB993 billion in January, up from RMB555 billion in December. The figure was slightly lower than a year ago but demonstrates that attempts to restrict the risky and opaque practice are failing.
Perhaps it takes an industry scare to fight shadow lending. New trust loans, one of the three main categories in off-balance-sheet lending, weakened compared to December and the year before. China Credit Trust, a wealth management product (WMP) funded by trust loans, came to the brink of defaulting on payments at the end of last month, showing the increasingly not-so-hidden risks in the products as they mature.
At the same time, the remaining two categories of off-balance-sheet lending surged. Entrusted loans hit an all-time high at RMB396.5 billion. So did bankers’ acceptances at RMB490 billion, indicating that investors still had an appetite for dangerous shadow products.
For those rooting for strong economic data this year, the jumpstart in credit might belie the true state of growth. Much of the lending in January went to corporations looking to roll over loans. About 38% of new loans in January went to corporations. Companies in China must repay US$427 billion in principle and interest this year, almost a fifth higher than in 2013. The Chinese government might even let one or two corporations go bankrupt in 2014.
So, despite the record high TSF, not much was going into new projects, but rather propping up highly leveraged companies. “Real investment demand remains weak, as evidenced by slowing fixed-investment since August,” according to a note to investors from Mizuho Research in Hong Kong.
The market is now looking to PBOC for some insight on the credit outlook for the rest of the year.
At the close of 2013, regulators at the central bank looked determined to rein in credit expansion at the cost of economic growth. While they still might be willing to make some sacrifices, PBOC has lightened up a bit since then.
In the bank’s fourth quarter monetary report, it stressed “stability” and “overall planning.” That comes in sharp contrast to the cash crunches it engineered last year with the intent of sending a message home to banks that said “manage your balance sheets better.” Barclays analysts said that PBOC’s self-described “prudent” policy stance can be tough to interpret and “at times this could mean tightening, loosening, a neutral policy stance, or a neutral stance with a tightening or loosening bias.”
However, PBOC isn’t as hawkish as it wants banks to think. When central bankers tightened liquidity and sent interbank rates soaring in 2013, GDP was posting strong figures, inflation was rising slowly and property prices were climbing rapidly. Things have changed. Growth is slowing and investment is decelerating at home, while tapering in the US has hit emerging markets and potentially those country’s orders for Chinese goods.
The central bank will likely be more cautious going forward and lenders needn’t worry as much as last year over another major PBOC-designed squeeze in the money market. As Wang Tao, a Hong Kong-based economist at UBS, acknowledged in a note on Monday, the true risk now is the volatility of credit.
Last Thursday, the central bank put out new regulations on WMPs in the interbank market, one of several strategies to beat back off-balance-sheet funds. These kinds of regulations put sudden stoppages in the credit market. So would any full-on defaults in the shadow banking sector. If regulators come in with tougher measures, or credit defaults take the center stage, that will make for a highly unpredictable credit supply during the rest of 2014 and likely hurt real economic growth.
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