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"Cavalry Won't Be Coming From The East" - China New Loans Jump But Not Nearly Enough, FX Reserves Drop Most On Record

Another month passes, and once again everyone gets a hearty laugh at China's endless promises to really start deleveraging for real, seriously this time, we promise... just not right now. Case in point, yesterday's report of new credit numbers which showed that in September new loans were CNY857.2bn, up from CNY702.5bn in August and well above consensus of CNY750bn. In fact, this was the highest amount of new loans for the month of September on record.

When one adds all the components, including shadow banking, the result is a Total Social Financing number, which also recovered, rising to CNY1,050bn from CNY957bn, if quite a bit lower than the numbers record in the early part of 2014: while the PBOC is not too crazy about deleveraging, it appears to be much more interested in purging the shadow credit conduits in favor of conventional ones.

Barlcays has the component breakdown:

While off-balance-sheet lending fell due to continued regulatory scrutiny of the shadow banking business and reduced risk appetite amid rising defaults and NPLs, direct financing was strong. Equity financing rose to a 43-month high of CNY61.1bn from CNY21.7bn in August, more than offsetting a slight fall in net corporate bond issuance to CNY186.7bn (August: CNY194.7bn). Overall, we believe the pickup in new loans and total social financing suggests government efforts to guide interest rates lower and support investment demand are having an impact. 

Or, as Bloomberg calls, "the central bank’s targeted measures to boost liquidity helped spur lending." Perhaps, although as Sean Corrigan notes, there is a long way to go:

Chinese Real M1's increase was less than 1/4 the pace of that during the pre-Crash boom and, in nominal terms, the last three months' 5.7% average is well below where anyone is projecting NGDP (7-point-something 'growth' plus 1-2% price change). In fact, it is not much over a third of the average rate of the 1996-2008 boom and a quarter of that seen in the Great Reflation of 2009-10 (as well as less than 1/6 of that episode's peak).

 

 

As for the total credit aggregate, QIII enjoyed the smallest addition in 3 years (off 40%YOY and -54%QOQ to scrape the bottom of the past five years' range and to stand at ~60% of its average value for that period). Within that, the non-bank loan  - or 'shadow' component - was the smallest since the post- GFC reflation was undertaken 5 1/2 years ago (and was off a whopping 80%YOY and 85%QOQ). 

 

Even so, given that M1 has been unchanged for 6 months (making for an annual increment no bigger than it was way back in 2006 when the NGDP was one-third the size it is today), the ratio of 12-month cumulative additions of higher-order credit to money proper soared from ca. 6:1 to close to 11:1. This strongly implies that while things may still be rolling down the production line, if they actually do make it all the way to the end and are not piled up in a warehouse somewhere, they are not being bought for cold, hard, transaction-terminating cash. 

 

Granted, such higher credit aggregates can temporarily plug the monetary gaps, but ultimately this can only mean slower growth, less rapid price rises, ever more illiquid balance sheets (more 'revenues' tied up in receivables and a bigger gap between 'profits' and actual cash), and more recourse to financial trickery to stay afloat. Looks like lots more 'gold' exports to HK will be needed unless today's announcement that SAFE is to conduct an audit of 'trade finance' in Shenzhen manages to bung up that particular loophole! 

 

One other salient feature to note in China: QIII-14 non-household power consumption was only 2.5% ahead of QIII-13, just more than half of  QII's relatively tardy 4.9% YOY rate. Just like the money numbers, not exactly consistent with  7.x% GDP and 8.x% IP Growth, one might think.

 

If markets are awaiting the Cavalry, they won't be coming from the east - whatever the official data release tries to pretend.

Last thing worth noting: in Q3 Chinese forex reserves dropped the most on record. Per BofA, FX reserves declined by US$103bn in 3Q to US$3,890bn at end-September, which is in contrast to the increases in 1Q and 2Q14 at US$127bn and US$45bn, respectively.

We see three factors potentially contributing to the decline. First, according to our estimations, there was continued capital outflow in July and August partly driven by weaker growth momentum in China. Second, the recent dollar strength could also have led to a lower FX reserves given the valuation effect. Moreover, the PBoC could have reduced its intervention in the FX market suggested by its balance-sheet data."

And per BBG, the PBOC scaled back intervention in FX the market, leading to lower pace of forex reserves accumulation, according to OCBC economist Tommy Xie writes in note today.  As cited by Bloomberg, companies, retail investors are more willing to hold FX as they no longer expect one-way CNY appreciation, contributing to drop of forex reserves last quarter.