Chinese credit crunch

Credit growth continued to slow in August. The broad credit measure total social finance (TSF) slowed to 15.3% y/y in August, from 16.3% y/y in July. Seasonal adjusted growth in TSF stayed subdued at just 0.8% m/m in August, meaning that the underlying TSF has been just 10.0% annualised over the past two months. In other words, China might finally have reached the stage where total credit is no longer growing faster than nominal GDP.

Growth in shadow finance has also continued to slow markedly. In August, growth slowed further to 21.4% y/y, from 24.6% in July. Seasonal adjusted growth in shadow finance in August slowed markedly to just 0.3% m/m, from 1.2% m/m in July. In the past two months, shadow finance has increased only 9.4% annualised and hence underlying growth in shadow finance is currently substantially weaker than suggested by the still-high year-on-year growth in shadow finance. Traditional bank loans increased 10.7% annualised over the past two months and hence it appears that traditional bank loans are now growing faster than shadow finance.

Within shadow finance, we continue to see a sharp slowdown in loans from trust companies. In August, loans from trust funds contracted slightly for the second month in a row. The weakness in loans from trust funds has been offset partly by strong corporate bond issuance, although corporate bond issuance has also slowed slightly since its peak in April. The implication of the sharp slowdown in loans from trust companies is that companies dependent on loans from trust funds like small- and medium-sized developers face very difficult refinancing conditions. The slowdown in loans from trust companies is in our view currently the single biggest source of credit event risks in China.

M2 money supply growth in August eased to 12.8% y/y, from 13.5% y/y in July, and hence is again slightly below the government’s 13% target for M2 money supply growth. However, overall real M2 money supply has been relatively stable and does not suggest a severe credit crunch. As a leading indicator, real money supply growth suggests an economy moving sideways rather than slowing sharply.

So far, there are no signs that the renewed slowdown in credit growth in recent months is perceived as a major systemic risk. Money-market rates have continued to edge slightly and the swap-government bond spread has been stable below its fiveyear average over the past month. Offshore CDS premiums for Chinese banks have continued to edge slightly lower. Corporate bond spreads have also been stable. That said, corporate bond spreads for lower quality corporate debt continue to trade at relatively stressed levels suggesting that markets are increasingly starting to price the possibility of default.

The weak housing market remains a concern. So far, no clear signs of stabilisation in new home sales. New homes sales tend to lead both house prices and construction of new homes. Hence, we need to see a stabilisation in new home sales before we can call the bottom for the property market.