China Credit Growth Lowest Since 2005

By John Richardson

ChinaCreditMarchCHINA’S polyolefins markets have picked up over the last few weeks on reports of tighter supply.

For example, there are no less than 15 turnarounds taking place in China between March and June. This involves the shutdown of 2.61m tonnes of polyethylene (PE) capacity and 1.63m tonnes of polypropylene (PP) capacity on an annualised basis (obviously much less in terms of lost production).

Buying interest has also been boosted by reports of outages.

ExxonMobil had reduced its supply of linear low density polyethylene (LLDPE) and polypropylene (PP) from its facilities at Jurong Island in Singapore because of an on-site shortage of feedstock propylene and ethylene, industry sources said on 3 April.

And Qatar’s Qatofin planned to shut its 450,000 tonne/year LLDPE plant in Mesaieed in mid-April for a turnaround, according to a source close to the company.

Some of the indigestion caused by record-high imports in January, and higher-than-expected imports in February, seems to have also eased.

But we maintain that whilst this type of analysis remains crucial in working out where markets are heading, credit is still the thing, the most important thing.

We worry that valuable time has been lost in this crucial areas of analysis. It was clear late last year that credit would be the most-important factor in shaping markets in 2014. Instead, people wasted time in thinking that China’s government would blink.

This article, from the Wall Street journal, once again underlines how the government remains resolutely committed to the credit drawdown.

In summary, the Wall Street Journal reports that:

  • Overall lending in the economy, known as total social financing, grew in March at the slowest pace compared with a year earlier since 2005. Traditional bank lending carried most of the credit-creation burden, yet there was only a 13.9% increase in loans outstanding in March. That’s low given that companies often front-load borrowing in the first part of the year. Growth in trust-company loans has evaporated so far this year as high-profile defaults rocked the shadow-banking industry. It was a similar scene for China’s corporate-bond market, which suffered its first default in March.
  • Policy makers don’t target total social financing per se, but they do keep close watch on a measure of money supply known as M2, which tends to rise in tandem with lending. It grew 12% in March from the year before (see the above chart). That’s faster than nominal GDP, indicating there is still excess cash sloshing around the economy. But it’s the slowest money-supply growth since 2001, when credit wasn’t so important as grease for the economic wheel. Back then, cheap labour, market reforms and surging exports drove the boom.