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Chinese lending falls, money supply growth slows

  • Chinese aggregate financing fell to 1.23T yuan ($204B) in December from 1.63T yuan a year earlier, but came in above consensus of 1.14T yuan.
  • Still, that and other data reflect the impact of the efforts by the People's Bank of China to rein in ballooning credit growth even at the expense of slower economic expansion.
  • New loans dropped to 482.5B yuan in December from 624.6B yuan in November and missed forecasts of 600B yuan.
  • Foreign-exchange reserves increased to a record $3.82T at the end of December from $3.66T in September.
  • The broad M2 money supply rose 13.6% on year in December vs +14.2% in November and consensus of +13.98%.
  • "The slowing M2 growth in December showed central bank's tightening measures have started to bite," says economist Jiang Chao.
  • However, the central bank is apparently not having it all its own way, and has reportedly become frustrated at the lack of desire of the China Banking Regulatory Commission to strengthen the regulation of banks' relationships with shadow lenders.
  • Meanwhile, at least nine Chinese provinces have set reduced growth targets for this year.
  • The Shanghai composite is -0.2%.
  • ETFs: FXI, GXC, PGJ, FXP, HAO, CYB, YINN, CNY, TAO, CHIQ, CHIX, ASHR, YANG, MCHI, PEK, CQQQ, KWEB, XPP, QQQC, DSUM, YAO, CHXX, FXCH, CHII, CHXF, ECNS, YXI, CHIE, CHIM, KFYP, FCA, TCHI, CHLC, CHNA
This was corrected on 01/15/2014 at 07:38 AM.
Comments (1)
  • Mike Holt
    , contributor
    Comments (1538) | Send Message
     
    As with most economic data, trends are more meaningful than single data points, but the economic data and topics covered in this Update are extremely important and seem to be under appreciated by most investors.

     

    Rather than slowing in a more gradual fashion as the leading edge of the disproportionately large baby boom generation was expected to reduce spending in their fifties to save for retirement, economic growth in developed economies led by consumer spending was sustained by easy access to credit and the wealth effect of a corresponding increase in residential real estate which many perceived as their retirement nest eggs.

     

    When growth in developed economies came to an abrupt halt as a result of the bursting of the housing bubble and ensuing financial crisis, deflation triggered by deleveraging and adverse feedback loops suddenly took center stage, and the importance of economic growth became apparent to all. We looked around and saw that economic activity was still taking place, but a slowdown of just a few percentage points was creating havoc, especially since debt levels had increased so dramatically over the previous twenty years.

     

    Then, China introduced what was supposed to be a temporary stimulus program intended to offset what was thought to be a temporary decline in exports, so rather than being ravaged by its dependence on exports, the Chinese economy seemed to have reached a level of development that allowed China to become decoupled, and China became an engine of growth for the global economy as well.

     

    But, China's debt-fueled Fixed Asset Investment spending is not sustainable and the challenges of debt and demographics did not disappear despite efforts by central banks in the US, Europe, Japan and the UK to stimulate their economies and reflate asset prices in the hope that this would restore confidence and unleash what John Meynard Keynes referred to as the "Animal Spirits" among consumers and investors.

     

    So, upon recognizing that the decline in consumer spending in developed countries was not just a temporary phenomenon, the CCP that still controls the Chinese economy realized the danger of continuing to borrow and spend on unecessary additional productive capacity and infrastructure that does not generate enough revenue to cover even the interest payments on the massive amounts of debt that it has been incurring. But, this ongoing Fixed Asset Spending that has ballooned to over 50% of GDP, has spun out of control and the Central Government has also lost control over the debt channels that have served to finance this spending. And, it will take many years for needed reforms to allow the Chinese central government to rein in these problems other than by relying on their Central Bank, the PBOC, to cut-off financing to banks, to arrange for the transfer of non-performing loans to "bad banks" (there were previously four large government controlled bad banks, but one, Chinda, just went public in the largest IPO in Hong Kong for 2013), and to "allow" foreign investors to invest in China, including through "A" shares of Chinese companies.

     

    The question is whether these measures will allow China to avoid a hard landing similar to that experienced by developed countries when they had to deal with the bursting of asset bubbles and a credit crisis. If a soft landing can be achieved, the impact of China's attempts to rein in its Fixed Asset Investment spending and the short-term, high-interest rate, off-balance sheet financing that has been used to finance this long-term spending may be limited to commodity-exporting countries or those that have benefitted from low interest rates brought about by the massive level of money-printing by the PBOC which dwarfs that of the Federal Reserve. Under this scenario, capital may continue to flow from emerging market countries to developed markets as it has over the past year. But, investors should bear in mind that the two primary conduits of financial contagion are trade and financial markets, and China is not only the second largest-economy in the world, it is also the world's largest trading partner, and the world's largest creditor.

     

    That is why the developments in this Update are so important, and should be welcomed by investors.
    15 Jan, 09:08 AM Reply Like
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