By John Richardson
WHEN the demand for lending in any economy starts to decline, you know that the people who make up that economy have an understanding that things are likely to get worse before they get better.
Hence, chemicals and other companies need to take note of the latest survey from the People’s Bank of China (PBOC), involving interviews with 3,100 banks.
It shows that:
- The loan demand index fell to 66.6 in Q3, down from 71.5 in the second quarter (see the above chart), according to this FT Beyondbrics blog post.
- Business confidence also continued to decline, said a PBOC survey of 5,900 businesses.
“Growth in loan demand from both the manufacturing and non-manufacturing sectors has fallen to its slowest pace in two years, according to the bank survey,” said Capital Economics in a note.
“Although the slowdown has been broad-based, loan demand remains strongest among small firms.”
The fall in demand for lending as whole, however, should be of great concern for chemicals companies as they prepare for Q4 and next year.
What it says is this:
- Even if Beijing was to launch a few further minor stimulus measures, (and they would be minor – you need to give up false hope of anything else) businesses might well remain unwilling to take advantage.
- The reason is this: A lot of people in China always knew that the old growth model was unsustainable and that it had to at some point come to an end. They now recognise that the end-game has arrived. Unlike many of the analysts and CEOs outside China, they also recognise that the government is not going to change course.
- This determination to stay on course was further underlined by the much-reduced growth in availability of new credit in January-August. Official lending was up by just 5% as shadow banking lending collapsed.
You would be crazy to borrow more money when the economy looks likely to slow down even further as reforms intensify.
This Wall Street Journal article provides strong anecdotal evidence backing up our view. The newspaper writes as follows:
A lending index in the city of Wenzhou, a place famous for its entrepreneurs that is seen as a bellwether for both small businesses and China’s informal lending system, showed interest rates have been flat since last year. Rates would have fallen had the easing efforts [minor economic stimulus measures introduced earlier this year] been more successful.
The numbers come amid signs of weakened domestic demand: Imports have been sluggish, and the property market is slumping. Economists also say Beijing’s two-year anti-corruption campaign is casting a chill over consumption and investment.
Many Chinese companies appear less eager to spend. At PetroChina Co, the US- and Hong Kong-listed arm of China National Petroleum Corp, capital expenditures fell 15.8% during the first half of the year, compared with a year earlier.
At China’s largest refiner, China Petroleum & Chemical Corp, known as Sinopec, capital expenditures also fell, led by spending slowdowns in its exploration-and-production and marketing-and-distribution segments.
Print these next sentence out, stick them on your boardroom wall, and think through the implications: We are now in a situation where both the supply of and demand for lending in China are in decline. What does this mean for a 2015 budget forecasts?