China: Bubble Trouble May Be Brewing

by: Acting Man

Money Supply and Lending Growth Decline Sharply

Both the growth rate of China's narrow M1 money supply and the broader M2 measure have recently declined to levels not seen in many years. Here is a recent chart showing both:

20140303ChinaMoneySupplyWAnnualized growth in China's narrow money measure M1 (currency and sight deposits) has collapsed to just 1.5%, a level not seen in at least the past 15 years (and probably a good while longer). M2, which includes savings deposits, corporate time deposits, deposits in trusts and a few other smaller items, grew at 13.2% year-on-year, but even that is one of the lowest growth rates of the past decade.

We're not 100% sure if China's M1 is a good proxy for money TMS, as there is a paucity of readily available monetary data from the PBoC (its web site is basically useless, at least it was when we last looked), and we don't know whether savings deposits are available on demand in China or not, but it is a fairly good bet that it actually is at the very least a good proxy for TMS-1.

As such we would expect it to be more volatile, which it indeed is. As you can see, its growth rate has peaked at nearly 39% year-on-year in the post Lehman push by the Chinese authorities, when they took steps to reliquefy the system by ordering China's banks to lend as much as possible to all comers. It's a good thing we have fiat money and these central planners everywhere, as that sure lowers the monetary system's volatility a lot. Steady as she goes.

Looking at M1 in absolute numbers, we can see that the sharp drop-off in the annualized growth rate was the result of a very big monthly contraction in M1 early this year. This suggests the authorities are deliberately stepping on the brakes, or are at least not trying to counter a case of private sector loan contraction.

Click to enlarge

China's M1 money supply in absolute numbers. There have been several instances of month-on-month contractions, but the most recent one was unusually large.

It is no wonder in light of these developments that China's economic data have lately been on the weak side. We understand the authorities are trying to restore some balance to the system after the credit binge of 2009-2010, but there is a not inconsiderable chance that this time, they will end up producing a major bust in the process. That is not a problem per se, but we are wondering how much capital malinvestment it will actually reveal. It could be a lot, judging from the anecdotal evidence of entire cities standing empty, vast stock piles of industrial metals securing loans that are in turn invested in dubious "wealth management" products, the extremely large capacities in heavy industry, and so forth. A chart showing bank loan growth and "total social financing" further buttresses the idea that a major slowdown and perhaps even a recession could be close at hand:

Click to enlargeChina: Bank loan growth, "social financing" growth (includes shadow banking channels) and nominal GDP growth.

Stocks Are Already in the Dumps – Is It Real Estate's Turn Next?

2013 was a year of brisk price rises for real estate in China's major cities. These cities are experiencing the by far greatest urban population growth, and in previous years, China's authorities were targeting them for a selective reining in of property speculation. These selective curbs were lifted by the new government in late 2012, leading to a price explosion in 2013.

Admittedly, China's property market is difficult to decipher from afar. One often wonders how it is possible for prices to remain as sky high as they are (especially relative to incomes) in view of so much supply coming on stream over the years. Partly the supply is probably soaked up by ongoing urbanization, and partly the resilience of prices is probably due to the country's closed capital account. Many people evidently don't know how to best invest their savings in light of interest rates that are often negative in real terms, and real estate is regarded as a "sure thing" (and so far, it has been).

However, the rate of price increases in the large cities has begun to turn down lately:

Click to enlarge

New home prices, year-on-year percentage change in large Chinese cities.

One thing is clear, there are many signs that economic activity in general is possibly on the verge of contraction. PMI data have been consistently weak for instance, especially in the manufacturing sector. If a more widespread decline in real estate prices were to happen, banks could soon be forced to admit to more NPLs than they have so far done.

Miscellaneous Charts – Bank Loans, NPLs, Trust Products, Steel Production

We found the following "all is well"(?) chart published by the Economist magazine a while back, that compares loan and NPL growth in China:

all is wellIt does not look very credible, but there it is …

According to estimates by China's Banking Regulatory Commission, NPLs will rise a tiny little bit in coming years, but by and large there is nothing to worry about… (note that the 2012 low in NPLs for listed banks only was even lower at just 0.93%!)

Click to enlarge

NPLs across the entire banking system, actual and estimated (official estimate).

But looking at a few other charts, we can just not bring ourselves to actually believe it.

Click to enlarge

Wealth management products up for redemption every month until January 2016, via BAC.

Click to enlarge

China's steel production – evidence of malinvestment? We think so.

Click to enlarge

And lastly, the Shanghai stock index – still in a downtrend.


There is plenty of scope for a financial/economic "accident" in China now that money supply growth is slowing down sharply. Like nearly every year, we wonder once again if the mandarins in Beijing will be able to pull yet another rabbit out of the hat. One of these days, the wizards will come up empty.

Charts by: Nikkei Asian Review, CLSA, Tradingeconomics, BigCharts, BofA, Economist, CBRC,