By John Richardson
WE HAVE now seen two months of a very important shift in the pattern of credit growth in China:
- In January, new local-currency bank loans were Rmb2.13 trillion ($310bn).. This was far above December’s Rmb994bn, but there is always a big seasonal surge in lending every January. Crucially, this January’s figure was below the Rmb2.54 trillion during the same month last year. And outstanding bank loans grew at 12.6%, the slowest pace since 2006.
- Whilst overall February lending was more than analysts had forecast, lending by the shadow banking sector and mortgage lending were both down. For example total household loans, which mainly involve new mortgages, fell to 25.7% of total tending last month from 50% in February 2016.
China has set its 2017 GDP growth target at around 6.5% – less than last year’s target range of 6.5%-7%. And if achieved, 6.5% growth would be less than the actual 6.7% growth claimed by China for 2016.
It has also pledged to continue reducing excess capacity in oversupplied industries such as steel and coal. Some 726,000 jobs were cut in these industries in 2016, with a further 500,000 job losses planned this year.
This tells us that a.) China’s President, Xi Jinping, who heads the reformist “Princeling” political faction, is back in control of the economy, and b.) He is demonstrating this control by putting his foot back down on the accelerator pedal of economic reforms.
Xi recognises that China doesn’t have any more time to waste following last year’s re-inflation of the credit bubble, which undid much of the good work done during 2014, when reforms were powering ahead.
A quick Google search using the words “China’s debt problems” will provide with you plenty of data indicating the urgency of the task now confronting Xi. For example, the above chart – from the Swiss-based Bank for International Settlements (BIS) – shows China’s debt-to-GDP gap is at 26.3%, which is the highest in the world. The BIS believes that anything above 10% indicates elevated risks.
What Happens Next
The government will maintain its efforts to rein-in the wrong kind of lending. Shadow lending will thus steadily fall throughout this year, as will lending to the real- estate sector and oversupplied manufacturing industries.
Meanwhile, China will continue to pour as much money as it can afford into its pivotal One Belt, One Road initiative (OBOR). As we describe in our new Study, the OBOR has to work if China is going to achieve its overall economic reform programme.
Lending will also be prioritised to innovative manufacturing and service companies. These are the companies that China hopes will produce the higher-value goods and services it needs to escape its middle-income trap.
The net result will likely be these two things:
- As the government has stated, slightly lower GDP growth in 2017 (note the risk of a greater downside due to the Trump effect).
- Deflation of the commodities bubble that was in part re-inflated by China in 2016. As I discussed last Friday, crude markets are waking up to the realities of supply and demand for reasons other than China. Add a slowing China to the mix and this will mean more downward pressure on oil prices.
On Wednesday, I will consider what all of this means for one major sector of the petrochemicals industry – polyolefins, both in China and globally.