China: Credit growth continues to slow but it's not yet a credit crunch

In China new credit improved slightly in September but the improvement was less than expected. The underlying picture remains that credit growth is slowing mainly due to a sharp slowdown in credit from shadow finance sources. So far it does not look like a severe credit crunch because the slowdown in loans from banks has been modest. The slowdown in credit growth in China is to a large degree a policydriven process and the weaker credit growth will be welcomed by the Chinese leadership as long as it does not compromise its growth target severely. This suggests that companies dependent on shadow finance funding will continue to face difficult refinancing conditions and investment demand in China will continue to suffer.

M2 money supply growth has eased slightly in recent months but real money supply growth has been stable because of the recent decline in inflation. Hence, broad monetary aggregates at the moment does not suggest a substantial slowdown in the Chinese economy, rather it suggests an economy moving broadly sideways. The current M2 money supply growth at 12.9% y/y in September is also close to PBoC’s 13.0% target for 2014 and hence in isolation does not suggest the need for any major easing measures.

New local currency bank loans increased CNY857bn (consensus: CNY750bn) after increasing CNY703bn in the previous month. The broader credit measure total social finance that also includes non-bank credit (shadow finance) improved CNY1,050bn (consensus: CNY1,150bn) from CNY957bn in the previous month. Hence, the improvement in new credit was largely driven by bank loans and new credit from shadow finance continues to be weak.

Growth in total social finance according to our calculations eased to 14.9% y/y in September from 15.4% y/y in August. Seasonally adjusted growth in total social finance in September improved slightly to 1.1% m/m from 1.0% m/m in the previous month. Underlying growth in total social finance in the past three months has been 12.1% 3m ann.

Credit from shadow finance sources continues to be weak. Growth in credit from shadow finance sources eased to 20.0% y/y in September from 21.4% y/y in August. The high year-on-year growth in credit from shadow finance sources masks the underlying weakness in shadow finance. Seasonally adjusted credit from shadow finance sources in September increased only 0.4% m/m after increasing 0.7% m/m in the previous month. In the past three months new credit from shadow finance sources has only increased 9.7% 3m ann. and hence is now growing more slowly than loans from banks.

The weakness in shadow finance is primarily driven by weakness in loans from trust funds and issuance of bankers acceptance bills. Loans from trust funds in September contracted for the third month in a row and the year-on-year growth eased to 13.9% y/y from 17.6% y/y in August. On the other hand, corporate bond issuance continues to be relatively solid.

Growth in M2 money supply growth in September accelerated slightly to 12.9% y/y from 12.8% y/y August Real money supply growth has been relatively stable in recent months as the moderate decline in growth in nominal M2 has been offset by a decline in inflation.