China eased up on its 2½-year campaign to reduce financial risks so that it could stabilise growth in face of the escalating trade war with the United States, but the results so far have been disappointing.
Credit growth hit a fresh record low in August while banks made fewer new loans, highlighting the difficulty faced by the People’s Bank of China in getting the financial system to translate the extra liquidity it is adding into financing to support the economy.
With US President Donald Trump threatening to impose tariffs on virtually all Chinese products imported into the US, China has switched to a pro-growth policy tone that allows additional infrastructure spending and a modestly more generous monetary policy.
The net growth of total social financing (TSF) – a broad measure of credit and liquidity in the economy that includes loans, bonds and other non-traditional instruments – rose to 1.52 trillion yuan (US$222 billion) in August from 1.04 trillion yuan in July, beating the market consensus for a gain to 1.3 trillion yuan, according to the data released by the central bank on Wednesday.
China’s central bank faces a problem getting nation’s lenders to actually lend more money
But most of the rise was due to a surge in new corporate bond financing, which rose to 337.6 billion yuan last month from the 223.7 billion yuan in July and accounted for about a quarter of the monthly expansion of total financing.
Economists said much of this “corporate credit” might not be genuinely corporate, but rather reflected the re-emergence of the old Chinese economic playbook of relying on large amounts of local government spending on infrastructure.
“These could be [bond] issues by local government financing vehicles,” Iris Pang, Greater China economist at ING Bank in Hong Kong, said. “Local governments rely in part on LGFVs for [the financing of] their fiscal stimulus plans.”
Figures from China Central Depository and Clearing back up this idea. They show the net increase in outstanding local government bonds jumped to 712 billion yuan last month from 578 billion yuan in July and was well above the monthly average gain of 20 billion yuan in the first half of the year.
When these new bond issues are combined with the social financing total, China’s aggregated financing grew 11.5 per cent in August year on year, slightly faster than the 11.4 per cent in July, according to calculations by Trivium/China, a Beijing-based think tank.
But without the bond issuance, total social financing growth slowed to 10.1 per cent from 10.3 per cent in July. And new on-balance sheet bank lending, which Beijing is trying to promote, rose much less than expected, with the growth rate steady at the same 13.2 per cent rate as in July.
Other than bond issuance, all types of non-bank credit contracted in August. The shadow banking sector, whose risky off-balance sheet lending Beijing was trying to curb with its deleveraging programme, continued shrinking in August, falling by 267.4 billion yuan from a year earlier, though the pace of contraction slowed somewhat from the 488.6 billion yuan drop in July, according to central bank data.
“At this point in the trade war, liquidity is vital,” Pang said. “There is no longer any financial deleveraging, policymakers are trying to re-leverage the economy.”
China’s monetary policy loosening is a sign that the central bank is gearing up for a fight
China started the deleveraging campaign at the end of 2015, but the effort to reduce debt levels increased pain for local governments as well as the small and medium-sized firms who relied on shadow bank financing to make up for their lack of access to bank lending. This caused the economy to begin to slow even before the start of the trade war.
During a meeting last Friday, the Financial Stability and Development Committee, the agency coordinating government financial regulation, called for fine-tuning monetary policy to maintain ample liquidity in financial markets in light of the challenges posed by the trade war.
Since the start of the year, the central bank has added 1.55 trillion yuan of liquidity to the financial markets by cutting the amount of money that banks are required to hold with it three separate times, 1.05 trillion yuan of which was target specifically to spur lending to the small and medium-sized businesses.
However, the additional liquidity has yet to have the intended effect. In August, Chinese banks made 1.28 trillion yuan of new loans, fewer than the 1.45 trillion yuan lent in July and below market expectations for 1.40 trillion yuan.
New loans to the corporate sector stood at 613 billion yuan in last month, down from 650 billion yuan in July.
The central bank added two components to its TSF statistics in July, resulting in a jump in its growth rate that month. However, using the old calculation method, the year-on-year growth rate of outstanding TSF, has continued to slide, hitting the weakest point of 9.6 per cent in August.
“The fundamental credit growth dynamics have not changed in August. The outstanding credit was not enough to change the overall trajectory of the slowing economy,” Trivium/China co-founder Andrew Polk said.
China’s central bank cuts reserve requirement ratio to spur lending
He said banks were confused by instructions to avoid risky lending on the one hand, and orders to boost lending to support the economy on the other. This had made the easing of monetary policy less effective, so that money flowing into the real economy through Chinese banks was insufficient.
“They [Chinese banks] don’t know what to do right now,” Polk said. “For the past year and a half, they have been told everything was about financial de-risking, now the government is trying to reverse course and encourage them to lend more.”
Given this, the central bank was likely to loosen monetary policy further, experts said.
Ting Lu, chief China economist at Nomura, wrote in a research note that the PBOC would not raise its interest rates if, as expected, the US Federal Reserve raised its interest rate in late September, to preserve low domestic borrowing costs, and would cut banks’ reserve requirement once more before year-end.
Pang predicted the Chinese central bank would cut the reserve requirement again at the beginning of October to give more support for small businesses, and could do more if Trump carried out his threat to impose further tariffs.
“If the trade war escalates, credit growth will speed up rapidly,” she said.