China: September credit was above expectations - Westpac

Elliot Clarke, Research Analyst at Westpac, explains that credit provision in China occurs through both the core and shadow banking systems – the latter is a network of trusts; investment funds; and intermediaries and September itself was above expectations and stronger than August.

Key Quotes

“For the September quarter, the increase was in line with the average through 2014– 2016 (excluding the outsized March quarter increase seen in each year).”

“Aggregate financing is up 16%ytd in 2017 compared to 12%ytd in September 2016. Bank loans have risen 15%ytd (11%ytd in 2016) while other finance has gained 22%ytd (15%ytd in 2016). Through 2015–17, around 74% of total aggregate financing has been supplied by the banks.”

“In the September quarter itself, over 61% of bank loans went to households. This share is up from 56% over the prior twelve months (to June 2017) and around 40% in the first half of 2016 – a share broadly sustained since 2010.”

“This highlights two salient points: (1) corporates demand for credit is modest versus history; (2) persistent house price gains and, to a lesser extent, consumption are boosting the demand for credit from consumers.”

“Authorities are not directly targeting or limiting growth in household leverage. But their governing of property markets seeks to manage how debt is used and, through stronger bank regulation, the terms on which funds are lent.”

“The use of wholesale funding by banks to expand their balance sheet is a trend that warrants close monitoring. To ensure financial stability amid rapid growth, high quality funding is as important as asset quality. This is even more true of the non-banks, who are increasingly turning to short-term interbank funding.”

“On non-bank lending more broadly, there has been a sharp pull back since the March quarter surge. In part this is because of greater corporate bond issuance, but it also looks as though demand has abated. Notably, entrusted loans (from one company to another) have been negligible. This could be due to a lack of demand and/ or large firms wishing to hold onto their capital.”

“All told, the September quarter highlights that momentum has been sustained in China’s economy in the second half of 2017. There is no immediate financial system risk, but close supervision is necessary to make sure none arise.”