Liquidity and lending

From "Greater China: Managing asset inflation" by Grace Ng, J.P. Morgan economist, December 17:

In addition to specific stimulus measures for the real estate sector introduced late last year, two major macro factors have contributed to the property price rally in China [in 2009]. First is the significant easing of monetary conditions by the central bank early in the year to combat the impact of the financial crisis and global recession on China. As a result, money supply M2 growth spiked at a much faster pace than nominal GDP, with the excess liquidity increasingly attracted to the asset markets. Second is the growing concern about a potential supply shortage, as new building starts and real estate investment slowed sharply since 2H08, which was largely due to the earlier credit tightening in 2007 and 1H08, reinforced by the sharp fall in property transactions amid the outbreak of the global financial crisis in 3Q08 … Both factors have been adjusting notably in recent months. With regard to excess liquidity concerns, along with the central banks’ recent withdrawal of excess liquidity through open market operations, sequential trend growth rates in M2 money supply and total bank loans have been easing from the elevated 1H09 pace … suggesting that M2 and nominal GDP growth should be much better aligned going into 2010. On the supply side, new building starts have recovered notably, as developers benefit from rising property sales and improving credit conditions.

From "China banks: Retail lending leading the way" by Sarah Wu and Nick Lord, Macquarie analysts, December 11:

While the increase in medium- to longer-term corporate loans remained solid, 68% of net increase in November loans came from retail loans … We believe improved sentiment towards property, supportive policies on autos and mortgages and the banks’ willingness to lend have all contributed to the acceleration in retail loans this year. We expect this to continue into 2010 … Discounted bills continued to fall as a percentage of total loans, from 6.6% in October to 6.3% in November. We expect this trend to continue, albeit at a more modest pace. We expect this mix change effect to bottom out by the end of 1H10 as capital and stricter regulatory monitoring become greater constraints on the growth of the banks’ off balance sheet commercial bills issuance in the coming quarters … We expect falling exposure to discounted bills and the modest up-tick on the yield of bills to remain positive drivers of margins into 4Q09, although we expect the incremental margin expansion to become more modest vs 3Q09. As we head closer to the year end, most of the focus has turned to 2010 lending growth. On this front, we expect to see fewer surprises at the headline level compared to 2009. We currently forecast RMB7.1 trillion of net new loans or 18% y/y loan growth in 2010. We expect the strength in retail and medium to long-term lending to continue into 2010.