De-risking is far from over

These past six months, China’s policymakers have been expected to throw in the towel by abandoning de-risking the financial system and rather embarking on blanket stimulus to place a floor under economic growth. It is true that policymakers have been re-calibrating monetary and fiscal policy to ameliorate the degree of momentum loss since August 2018. However, most analysts seem to think that the marked acceleration in new lending data in January is a harbinger of a further acceleration in credit growth. We would however disagree.

At the very least, it is too early to tell. Data in the first few months of the year has been both frontloaded and distorted by Chinese New Year. For instance, were various forms of lending pulled forward into January at the expense of February this year? We’d rather wait for the annual targets at the March National People’s Congress (NPC) meeting, and additional data flow, before making a call. We nevertheless don’t yet foresee authorities flooding the economy with liquidity. In fact, even the January data remains consistent with the stated overarching objectives of de-risking the market still being at the forefront.    

Note that a sharp acceleration in credit growth would contradict the way policymakers communicate policy intentions. For instance, in the latest monetary policy report, the PBOC characterized "prudent" monetary policy as credit growth and nominal GDP growth sharing roughly the same growth rate. Given that nominal growth moderated from 9.7% y/y in Q3:18 to 8.1% y/y in Q4:18 – and we expect around 9%-9.5% y/y average in 2019 – it is unlikely that outstanding credit will accelerate beyond the already lofty 10.4% y/y of January. In fact, recent meetings by the PBoC and the banking and insurance regulator reinforced statements from the China Economic Work Conference in December 2018 that de-risking the financial sector, alongside supply-side structural reform, remains the overarching macroeconomic framework.

However, should policy flip-flop, the de-risking campaign’s credibility would be undermined. To demonstrate, just last week President Xi Jinping at the Party School of the CPC Central Committee, attended by senior provincial and ministerial officials (including the entire Politburo Standing Committee), told senior officials to strengthen their ability in preventing and defusing major risks to ensure sustained and healthy economic development and social stability. He also called for concrete measures to make financing for medium-sized, small and micro firms easier and affordable, and to stabilize and support employment. Thus far, there hasn’t been massive credit stimulus; rather, targeted measures were selected to siphon funds to these areas. 

Back to the January data: only when one looks at the flow of new monthly additions to the subcomponents of total social financing (TSF) does the impulse look significant. Seasonal factors aside, the economy is still larger, and additional loans would likely be larger in absolute terms each year to maintain a stable run-rate. More importantly, the growth of the stock of outstanding financing, which is generally considered to be a superior gauge of the pace of credit growth, tells a more comprehensive story. Here, the credit data remains broadly in line with policy objectives of providing funding for private firms – especially SMEs, supporting the growth of the corporate bond market, and some relaxation on restrictions for local governments to issue special purpose bonds for infrastructure. Meanwhile, the regulating authorities remain focused on limiting the shadow banking sector.

Granted, headline credit growth accelerated from 9.8% y/y in December to 10.4% y/y in January – the first acceleration in four months and the biggest monthly acceleration in 19 months. In the spotlight was TS, which expanded by CNY4.6trn, compared to the range of CNY3.0-3.7trn during January in each of the past three years. Bank loans surged by a record CNY3.6trn in January. In fact, bank loan growth has been broadly accelerating since hitting a cyclical bottom of 12.6% y/y growth in May 2018, gradually rising to 13.6% y/y in January 2019. Simply put, banks have been lending at a swift rate, offsetting the contraction in the shadow banking sector.

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