Two of the key risk factors for China have been run-away off balance sheet financing and an addiction to credit. Numbers today should reassure on both counts.
While July aggregate loan figures were weaker than expected (although you should probably average June’s figure as that was skewed for seasonal reasons, and the August run-rate is accelerating) a part of the fall can be explained by massively reduced off-balance sheet finance, the first time since 2009 and a negative trust financing figure, the first contraction since August 2010.
As the PBOC themselves say:
“The drop in financing resulted from recent regulation and financial institutions’ enhanced control of risks”.
Run away off-balance sheet lending seems to be getting under control. That is a positive thing.
Now to the point China is a credit-junkie requiring ever increasing ‘shots’ of credit to illicit a commensurate rate of growth; well, money supply just fell 8.1% in July and yet most eco indicators suggest growth is still solid, albeit off elevated levels. In other words Chinese growth may be becoming more sustainable, and we still have room for more stimulus to come.
RRR cut to come?
Of themselves the loan figures may lead many to speculate China have room to add more stimulus. We wouldn’t disagree and in fact see the timing being right for a cut to the RRR, see our note yesterday for more on this.
http://www.aviatelive.com/best-european-stock-ideas-today-310/
But it’s the timing of this in the context of reform that interests us most. Should China be effective in controlling shadow-banking, bring lending back on balance sheet and then cut the rate in an attempt to stimulate lending, they do so through a centralised transmission framework that is regulated, controlled and transparent.
From a systemic risk perspective, this is a very good thing.
Stay long China and her supply chain.
Buy Norsk Hydro, Rio Tinto, Anglo American, BHP, Maersk, Peugeot, HSBC, Glencore… etc