By John Richardson
CHINA’S official bank lending was up just 5% in January-August of this year compared with the same period in 2013, according to some more value-added data crunching by our fellow blogger, Paul Hodges.
It is absolutely critical to put this 5% increase into this context:
•The Chinese Academy of Social Sciences, the government-run think tank, said in January that credit growth would have to be 12% for the whole of this year if the economy was to expand at the same rate as it did in 2013 (Note – this refers to the “real”, as opposed to the bogus official growth rate. Official GDP growth numbers have to be taken with a huge pinch of salt).
•A 12% rise in credit would “cause massive macroeconomic risk, because non-performing loans will pile up faster and the goal of reducing the economy’s reliance on credit-fuelled expansion will recede even further into the distance,” said the academy.
And so official growth in credit of just 5% has to mean a substantial economic slowdown, especially when you consider that, as are second chart above indicates, shadow bank lending has collapsed. Lending via the shadow, or private, lending system was down by 20% year-on-year in Q2.
Despite official lending being up by just 5% in January-August, there was a recovery in the growth of official lending in Q2. This was an attempt to capture more lending on the “official” side – i.e. by moving credit away from the highly speculative, and therefore risky, shadow system.
But we believe that in the third quarter, Phase 2 of the process is underway, which involves more controls on the growth of official lending.
We can see the impact of this lower credit growth on economic activity. For instance:
- Real-estate sales were down by 13.4% in August. House prices have fallen for the past five months, with the effects spreading to related industries. The output of washing machines is down 7.5% over the past year. This, of course, means lower demand growth for polymers, such as polypropylene and acrylonitrile butadiene styrene, that are used to make washing machines.
- Electricity output registered its first annual decline in more than four years in August.
- Industrial production growth slowed to 6.9% in August, its lowest level of increase since December 2008, during the global financial crisis.
Some petrochemicals markets participants still seen to be clinging to the notion that today’s problems are supply rather than demand driven.
In polyethylene, for example, there is a lot of talk about market weakness being mainly the result of new start-ups this year. These are estimated at 1.8m tonnes on annualised basis in China alone.
We think that this this talk is unhelpful as it involves a passive approach to planning – i.e. “all we have to do is wait until China’s economy returns to normal and then temporary oversupply will be absorbed”. Companies instead need to plan for a new economic reality.
More positively, opinion seems to be shifting towards our long-held view that China’s leaders will not blink – because they cannot afford to blink. This story, from the UK’s Daily Telegraph, provides further evidence to this effect.
Meanwhile, yesterday saw widespread but unconfirmed reports from bankers and economists that China’s central bank had injected Yuan 500 billion ($81 billion) into the financial system. This was said to be in the form of loans to the country’s top five banks.
We do not think that this decision, if confirmed, will change anything. As the Wall Street Journal points out in this article:
Unlike a reserve-requirement or interest-rate cut, this move doesn’t have long legs. The money comes in the form of three-month, low-interest loans to the banks. The loans could be rolled or augmented, but they could also easily be extinguished at the end of the term.
There are related motivations at play. Liquidity in the banking system typically tightens at the end of September, when cash is in demand for China’s week-long National Day celebration [Golden Week]. The central bank would likely provide additional liquidity anyway. The move ensures, however, that an inopportune spike in short-term interest rates won’t happen this year.