China Shadow Banking Returns as Growth Rebound Adds Risks; new credit almost doubled in August from the previous month

China Shadow Banking Returns as Growth Rebound Adds Risks

China’s broadest measure of new credit almost doubled in August from the previous month in a sign leaders are committed to meeting economic goals even at the cost of adding financial risks. Aggregate financing was 1.57 trillion yuan ($257 billion), the People’s Bank of China said in Beijing yesterday, topping the 950 billion yuan median estimate of 10 analysts surveyed by Bloomberg News. New yuan loans from banks accounted for about 45 percent of the total, down from July’s 87 percent, as non-traditional credit played a bigger role.The first pickup in credit growth after an unprecedented four straight declines, the fastest gain in industrial output in 17 months and above-forecast exports signal better odds that Premier Li Keqiang will achieve his 7.5 percent expansion target this year. The data also mark a resurgence in shadow banking that poses risks for the financial system after a record credit boom in the first quarter.

“If credit growth picks up persistently from here, China’s current growth recovery may well last a bit longer and go a bit further,” said Yao Wei, China economist at Societe Generale in Hong Kong. “However, that only adds to the downside risk afterwards, as the leverage of Chinese corporates and local governments keeps rising from the already alarmingly high level.”

M2 money supply growth accelerated to 14.7 percent, the fastest in three months.

Asia Comparisons

China’s lending spree in recent years has evoked comparisons to debt surges that tipped Asian nations into crisis in the late 1990s and preceded Japan’s lost decades. China’s ratio of credit to gross domestic product rose to 187 percent in 2012 from 105 percent in 2000, compared with Japan’s increase to 176 percent in 1990 from 127 percent in 1980, JPMorgan Chase & Co. said in a July report.

UBS AG has estimated the size of China’s shadow banking, including private lending, banks’ off-balance-sheet vehicles and trusts, at $3.35 trillion.

A government-engineered cash squeeze in June sent money-market interest rates to record highs and helped curb shadow banking, reducing longer-term dangers while adding to forces slowing economic growth. Now it appears that the crunch in liquidity and credit is over, Wang Tao, chief China economist at UBS in Hong Kong, said yesterday.

Bankers’ acceptance bills and entrusted loans, two of the categories within aggregate financing, are “highly correlated with shadow banking activities,” said Hu Yifan, chief economist at Haitong International Securities Group in Hong Kong.

Record Gains

Yesterday’s figures showed entrusted loans of 293.8 billion yuan in August, a record in data going back to 2002, after 192.7 billion yuan in July. Bankers’ acceptance bills were 304.5 billion yuan in August, compared to a 178.3 billion yuan decline in July.

“The sudden pickup is a bad signal we should be alert to and pay special attention to,” Hu said.

The increase in bankers’ acceptance bills, which represent promises of future payments, shows lenders are helping the economy at a time of tight liquidity, said Dariusz Kowalczyk, senior economist and strategist at Credit Agricole CIB in Hong Kong.

“When Beijing orders stimulus, funds will be found and growth will recover,” Kowalczyk said.

The government says debt risks are manageable. While the cabinet in July ordered a nationwide audit of government borrowing, Finance Minister Lou Jiwei last week called the scale of local government debt controllable and said the risk of default was “not great.”

Boost Supervision

Vice Finance Minister Zhu Guangyao said last week at a Group of 20 nations summit that while China needs to strengthen supervision of shadow banking, officials are aware that smaller businesses need access to finance.

“The tricky thing is, ultimately the PBOC is able to control the size of social financing and off-balance-sheet lending at the money-supply end, which will then result in overall tight liquidity,” said Ding Shuang, senior China economist at Citigroup Inc. in Hong Kong. “Yet it needs to strike a balance and not be too tight in monetary policy.”

Aggregate financing rose from a 21-month low of 808.8 billion yuan in July. New yuan loans in August were 711.3 billion yuan, compared with the 730 billion yuan median analyst estimate.

Other data this week also illustrate Li’s challenge in shifting away from an economic model dependent on debt and overseas demand toward domestic consumption.

Factory Production

Industrial output grew 10.4 percent from a year earlier in August, while retail sales for the month and fixed-asset investment for the January-August period also topped analysts’ estimates, data from the statistics bureau showed yesterday. Customs figures released Sept. 8 showed exports rose more than estimated last month.

Premier Li said yesterday at a meeting with corporate representatives in Dalian, China, that August indicators have shown a trend of recovery. Monetary easing, adjusting macroeconomic policies and increasing the deficit may have an impact in the short run yet won’t necessarily be beneficial in future, he said, according to the official Xinhua News Agency.

“The stronger data over the last couple of months have settled nerves about a possible hard landing,” and credit growth should sustain investment spending, said Mark Williams, a former U.K. Treasury adviser on China who is now a London-based economist at Capital Economics Ltd. “The omens for the short term are good, but at the cost of making the economy’s structural problems worse.”

To contact Bloomberg News staff for this story: Hu Shen in Beijing at hshen33@bloomberg.net

September 10, 2013 11:37 am

Chinese rebound built on stimulus money

By Tom Mitchell in Beijing and Simon Rabinovitch in Beijing

The “mini-stimulus” unveiled this summer by the Chinese government has hit its target with better than expected economic data pointing to modest rebounds in everything from manufacturing to electricity consumption and railway freight.

China’s industrial output increased 10.4 per cent year-on-year in August, a 17-month high and up from a 9.7 per cent pace a month earlier, according to data published on Tuesday. With retail sales, investment and exports all strong, the world’s second-largest economy has closed the books on a shaky half year and is now in recovery mode.

The encouraging data has prompted speculation that the modest measures announced in July, especially those aimed at railway development, were in fact cover for a more ambitious “quiet” stimulus spurred on by a raft of new infrastructure projects and generous lines of credit from China’s state-controlled banking sector.

“A new round of infrastructure investment is getting started in a rather low-profile manner,” said Dong Tao, an analyst with Credit Suisse.

Mr Dong contrasted the quiet stimulus of the past two months with the gargantuan Rmb4tn package launched by Wen Jiabao, China’s then-premier, when the global financial crisis struck in 2008. Li Keqiang, China’s new premier, views infrastructure spending as a growth stabiliser rather than an accelerator, Mr Dong said.

Towards the end of July, when worries were mounting about the Chinese economy after two straight quarters of declining growth figures, the government announced a series of measures to support growth, which analysts referred to as a “mini stimulus”. It reduced taxes for small companies, cut administrative red tape for exporters and expedited railway development.

The modest measures were consistent with Mr Li’s observation in May that “there is not much room to rely on stimulus policies and direct government investment”, as he warned that doing so would only “create new problems and risks”.Writing in the Financial Times this week, Mr Li said China “can no longer afford to continue with the old model of high consumption and high investment”.

 

But behind the scenes, the government has pumped more money into infrastructure. Local media said the State Council, or cabinet, authorised a Rmb40bn boost to its existing Rmb650bn target for railway investment – a small but symbolic move. Mr Dong estimated that the total spend on infrastructure projects from wastewater treatment to new subway lines approved by the government in recent months reached more than Rmb1tn. Many projects had already been planned but their implementation was sped up.

Some analysts, however, have raised questions about how sustainable the current rebound really is.

Even in China, large new infrastructure projects cannot be willed into existence overnight. The Beijing municipal government, which quadrupled the size of the city’s subway system over the past decade to encompass 17 lines and 456km of track, already had long-established plans to expand the network a further 50 per cent by the end of 2016.

“In terms of real demand the situation hasn’t changed. Many of these projects were already in the pipeline,” said Xianfang Ren, a China economic analyst with IHS in Beijing.

The current pick-up in growth is also partly a delayed consequence of a surge in credit issuance at the start of the year. But after a liquidity squeeze in June, credit growth has started to slow. “A continued slowdown would bolster our view that the economic rebound will peter out over the next few months,” Mark Williams, an analyst with Capital Economics, wrote in a recent note.

Still, improved sentiment can provide a tangible boost to the economy. Variations of the so-called Keqiang index, named for Premier Li’s fondness for supposedly more reliable economic indicators, have showed a surge in electricity generation and railway freight.

“Once the spending starts the economic effect should come through,” said Peng Wensheng, an economist at China International Capital Corp. “Expectations that growth will stabilise can have a positive effect.” As evidence of the spillover, he points to a recent pick-up in iron ore prices, oil imports and land sales.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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