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China: Sweat The Lending Data

China, Company Strategy, Economics, Polyolefins, US
By John Richardson on 07-Feb-2014


By John Richardson

C-Horse1-2014AAS business slowly gets back to normal following the Lunar New Year, everyone will be scrabbling around for indications about whether the January downturn in China was just a short-term blip, or something more significant.

Confidence that things are back to normal might be taken from this Forbes article, which quotes a Nomura estimate that official bank lending recovered very sharply in January after its sharp decline in December.

But we think that:

  • We have to, of course, wait for official confirmation of this estimate – and also for the total “social financing” number for January. This will include both official lending and new credit via China’s shadow-banking system, the biggest source of financing for the country’s plastic processors.
  • And we have to wait even further, probably until the end of Q1, to get a clearer idea about whether the “when” has become the “now”. A contraction in shadow bank lending over the whole quarter would provide support for our belief that the when, is, in fact, now. Thousands of the less competitive plastic processors may have to close down, if regulators’ efforts to tackle the shadow-lending sector are being successful.

What we continue to find perplexing is the comparative lack of coverage about this critical issue.

A Google news search this morning, for example, using the words China bad debts produced 27,700 hits, China lending, 16,400 hits and China shadow banking 7,940 hits. This compares with 56,400 hits for “Fed tapering”.

This was obviously a highly unscientific search, but we do think it underlines what we are still reading in the financial press and hearing from some chemicals producers:  That it is the Fed’s quantitative easing drawdown which is the biggest threat to global growth this year and not China.

These statistics are worth repeating: China’s shadow/official bank lending could total as much as $16.3tn (double China’s GDP) since 2008 and even by conservative estimates is around $10trn.

This compares with what we know for certain because the data can be relied upon: The Fed has spent $3.5trn since 2008 – $2tn on Treasury bonds and $1.5tn on mortgage bonds.

A problem, as we’ve highlighted above,  is the big grey around lending data from China. Perhaps this had led to the following response: “If we don’t know something for certain, we cannot plan for it. And so let’s ignore it and hope for the best”.

But even if you hope for the best, the drawdown of $10trn of additional lending is still an enormous deal and way overshadows Fed tapering.