What Chinese monetary tightening?

The headline is courtesy of the UBS note quoted further down. But to get to that we’re going to need some compare and contrast time.

First, Goldman Sachs outlining what is a fairly standard fear amongst those who think China is not on the surest path to sunlit economic uplands, even if concerns about an imminent crash have moderated over the past year or so:

The biggest vulnerabilities to unintended tightening are probably in the less formal areas of off-balance sheet spending (on the fiscal side) and non-bank credit extension (on the monetary side). On-budget fiscal policy is relatively transparent and controllable, but how local governments will respond to changing incentives—including anticorruption efforts, shifts in performance criteria, and changing availability of credit—is harder to predict. Likewise, policymakers have considerable influence on direct lending by large state banks, but less so on other bond market participants or “shadow banking” entities. This is especially true when multiple regulators/policymakers may be acting in a manner that is not completely coordinated.^[15] A particularly big challenge is how to unwind the perception of implicit guarantees on the debt of many SOEs and local governments’ financing vehicles without precipitating a credit crunch.
In summary, we see a policy tightening “accident” as a key domestic risk. Credit expansions can buckle under their own weight as leveraged asset prices rise to unsustainable levels and rising defaults prompt a reversal in credit availability. But with policymakers attempting to manage both housing prices and defaults directly, we think the central issue in the year ahead is policy calibration. Policymakers clearly do not want the economy to slow sharply, particularly ahead of the leadership transition later this year. At the same time, they need to address some of the imbalances in the economy to limit future volatility. Getting the balance right is particularly challenging given the leverage already in the system. Warning signs of overtightening could come from a large pullback in fiscal activity (Exhibit 9), a sharper spike in short-term interest rates (Exhibit 12), a widening in credit spreads (Exhibit 13; this might occur for example because of a reassessment of the value of implicit guarantees), or any sign that polices were causing an abrupt seizure in broad credit availability (Exhibit 4).

And then this from UBS’s Tao Wang on Tuesday after China’s January credit number came in “much higher than expected”:

While RMB loans rose by a less-than-expected RMB 2.03 trillion (BBG 2.44 trillion, UBSe 2.2 trillion) (of which loans to the non-financial sector rose 2.3 trillion), January’s broader measure of total social financing increased by a much stronger than expected 3.74 trillion (BBG 3 trillion and UBSe 2.8 trillion). Despite this, we estimate that our adjusted TSF growth (adjusting for local government bond swaps in the past 2 years) cooled marginally from December’s 16.1%y/y to 16% y/y in January. However, on a seasonally adjusted flow basis (of new credit over nominal GDP), our estimated monthly credit impulse picked up more visibly in January from 29% to 41% of GDP. On a 3 month moving average basis however (Figure 4), it held largely stable, edging up from around 35% to 36% of GDP.
[The] number suggests that despite concerns and debates about monetary tightening in recent weeks, Chinese credit growth remains quite strong and that monetary tightening has been working very much at the margin still. Outside of bank loans, corporate bonds shrank by RMB 54 billion, or 562 billion less than January last year, reflecting the recent volatility and higher costs in China’s bond market. However, undiscounted bills, January trust and entrust loans all expanded significantly, more than offsetting this decline in bond financing. As is usually the case in China, whenever one channel of funding is restricted, other channels tend to open wider.

Now, total social financing (TSF) is a broad measure of credit growth that misses some hidden “shadow banking” credit, which is particularly important given that “Chinese regulators’ gradual tightening of banks’ nonbank shadow credit channels in recent months has likely slowed down the expansion of hidden credit not included in TSF.” But from Tao Wang again:

Though we do not see benchmark rates being increased, we do expect bond yields and money market rates to stay elevated this year. Indeed, the risk of them moving higher has increased in recent weeks, but they will unlikely be allowed to reach levels that could jeopardize growth. Can Chinese corporates handle higher nominal rates? Yes. Already, the strong PPI rebound and turnaround in Chinese heavy industry this past half a year has improved top line corporate revenue/profit growth and debt service capacity, leaving the real economy much better placed to tolerate higher nominal rates versus the same time last year.
Ultimately, whether monetary tightening has a serious impact on the real economy and leads to slower leverage accumulation depends on how fast the resultant credit growth is. So far, while the policy makers have signalled a tightening bias for monetary policy since late 2016, and though the PBC has made many small regulatory/monetary policy moves that alarmed the market somewhat, December and January’s credit numbers clearly show that there has been no meaningful monetary and credit tightening at the macro level. Indeed, as we highlighted in our earlier reports, we expect credit growth to moderate only gradually to about 14.9% this year, down from 16.1% in 2016.

Good news for growth in the shorter-term then. And nobody wants policy accidents, well, ever. But that the Goldman note was entitled “Risks to China’s growth in the Year of the Rooster” is suggestive of the longer term risks being built up here.

Yes, there has been some “recent modest monetary policy tightening” and the medium-term plan is allegedly for debt-pain-allocation and the rebalancing of wealth towards the household sector.

But based on the above, the jusqu’ici tout va bien approach — in the shape of relative calm, per Goldman, at “the cost of further increases in credit and other imbalances” — appears to still be winning out.

Related links:
The four stages of Chinese growth – Pettis
“What if China lands hard?” they asked in 2013 – FT Alphaville