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China Reforms Stay On Track With 8% Credit Fall

Business, China, Company Strategy, Economics, Environment
By John Richardson on 15-Nov-2015


By John Richardson

THE above chart shows the moving average growth of total social financing (TSF) in China since 2009 in US dollars. You can see the surge  in the growth of TSF from 2009 until 2013 and its subsequent decline.

This decline has followed the crucial 3rd Plenum Meeting in November 2013, when China changed course. In 2014, the expansion in average monthly lending was down by 7% over 2013. So far this year, the fall over 2014 has been 8%.

And as you can also see from this chart, the share of shadow bank lending is sharply down. In percentage terms, the shadow banks accounted for 41% of TSF in 2012-2013. So far this year this is down to just 10%.

This tells us that Beijing hasn’t changed its position. There is no way it can afford to move away from the most risky and uncertain set of economic reforms for at least the last 20 years. Reversing these policies, which centre on reducing overall credit growth, would be nothing of an economic and environmental disaster.

The 75% fall in shadow banking’s share of TSF is also another key government policy initiative. It was the shadow system which was the conduit for all the trillions of wasted dollars that flowed into unneeded real estate, steel and cement factories and auto plants etc. Beijing is bringing lending back under control through raising the share of new credit issued by the state-owned banks.

Crucially, also, let’s return to those percentage declines in the growth of average monthly TSF and think about what they mean for GDP.

As is I said,  TSF fell by 7% in 2014 when in January of that year a government research body said that credit would have to expand by 12% if real GDP growth was going to each 7.5% for that year. This further confirms that we cannot trust official government GDP data.

This of course applies to this year as well. Beijing claimed that GDP growth expanded by 6.9% in Q3. But when you look at this latest fall in TSF you have to start wondering if even the recent 3.1% estimate for actual GDP growth in the third quarter might be too bullish.

This for me is the only way to view lending data in China if you work for a chemicals company. There is no point in looking at month-by-month data in isolation.

For example, TSF surged in September. This was attributed, amongst other things,to the government trying to rescue falling GDP growth through infrastructure spending.

But it is mathematically impossible for new infrastructure spending to fully replace the lost growth momentum from falling spending on real estate and oversupplied manufacturing. And that spending is obviously falling because of, as I said, the fall in average monthly TSF and the squeeze on the shadow-lending sector .

And, anyway, infrastructure spending on railways and roads is taking place in an effort to find long term replacements for lost investment-led growth – for example, through expansion of mobile Internet sales. The  key word two words here are “long term”.

Late last week we then saw panic ensue as October TSF growth fell to a 15-month-low. This led to the repeat of the “bad news is good news” theory – i.e. that Beijing would have to launch a big new stimulus package to solve the problem. But again, to repeat, this cannot and will not happen.

This kind of short term noise is fantastic for moving stock markets, but has no value for chemicals industry planners.