China Squeezes Shadow Banking as Li Grapples With Growth
Data for aggregate financing, the broadest measure of credit, showed new yuan loans played the biggest role since September 2011, with non-traditional sources of finance less prominent. M2 money supply rose 14 percent, down from 15.8 percent the previous month, People’s Bank of China numbers showed in Beijing yesterday.
A central bank-engineered cash crunch last month helped squeeze speculative lending and rein in what Vice Finance Minister Zhu Guangyao last week termed “prominent” shadow-banking risks. The danger for the government is that efforts to protect the financial system only worsen the nation’s slowdown after exports unexpectedly fell and manufacturing contracted.
“The impact of the PBOC’s liquidity crunch operation is very clear: targeting shadow banking but maintaining regular bank lending,” said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. The surge in the share of bank loans in aggregate financing reflects “a severe decline in shadow-banking activities,” he said.
Growth in the world’s second-largest economy probably eased to 7.5 percent from a year earlier in the second quarter, according to the median estimate in a Bloomberg survey of 45 analysts before data due July 15. That’s down from 7.7 percent in the first three months of the year.
Li has indicated he won’t boost credit to support the economy even as the pace of expansion slows, with the State Council pledging last week to improve the effectiveness of financial support while maintaining its “prudent” monetary-policy stance.
The PBOC released credit data after the stock market closed. The benchmark Shanghai Composite Index (SHCOMP) fell 1.6 percent yesterday, paring the gauge’s biggest weekly gain in two months, on concern the government’s tolerance for slower growth will hurt earnings.
Li said this week that the government should keep restructuring the economy as long as growth, employment and inflation stay within limits he didn’t specify. Finance Minister Lou Jiwei said in Washington on July 11 that expansion as low as 6.5 percent to 7 percent wouldn’t be a “big problem,” without specifying a timeframe.
Aggregate financing, the PBOC’s broadest measure of credit that includes bond sales, entrusted loans and bankers’ acceptance bills, was 1.04 trillion yuan in June, yesterday’s data show. That was down from 1.19 trillion yuan in May and 1.78 trillion yuan a year earlier.
New local-currency loans were 860.5 billion yuan last month, compared with the 800 billion yuan median estimate in a Bloomberg survey and up from 667.4 billion yuan in May. They accounted for about 83 percent of aggregate financing last month, down from about 52 percent in June last year, PBOC data show.
China’s foreign-exchange reserves, the world’s biggest, rose to $3.5 trillion at the end of June from a previous record of $3.44 trillion at the end of March, according to the PBOC report. Estimates of seven economists ranged from $3.4 trillion to $3.55 trillion.
M2 growth has exceeded the government’s 2013 target of 13 percent every month, reaching a peak of 16.1 percent in April.
“The dramatic slowdown in money supply growth explains why China’s banks were screaming so hard for help during the sudden tightness in mid-June,” said Steve Wang, chief China economist for Reorient Financial Markets Ltd. in Hong Kong. “Given that all the banks made it through the crunch and we’re just 1 percentage point away from the government’s M2 target, it signals a much smoother second half ahead for the banks.”
The nation’s overnight rate jumped to a record 12.85 percent on June 20 as the PBOC withheld cash and restricted its communication, spurring speculation policy makers wanted to expose banks using short-term funds too aggressively for longer-term investments.
The central bank injected liquidity to ease the squeeze and said it would maintain stability in money markets. The official Xinhua News Agency said in a June 26 commentary that “for the blessing of a more sustainable economy, banks are the first, but certainly not the last to suffer the hardship.”
While interbank rates have since declined, China’s credit squeeze is spreading to the nation’s auto dealerships as they become increasingly reluctant to ship their vehicles to neighborhood car lots without upfront payment. “The cash crunch has led to psychological panic among dealers over access to financing,” Luo Lei, deputy secretary-general of the China Automobile Dealers Association, said July 9.
At least five companies canceled or delayed scheduled bond sales of some 32.1 billion yuan last month amid the cash squeeze. China Three Gorges Corp., which operates the Three Gorges hydroelectric power projects, said June 24 it would delay a 5 billion yuan medium-term note sale.
Yi Gang, a deputy governor of the central bank, said the nation’s money market has recovered to normal levels and the financial market is stable. “At the moment, the tension has been relieved,” Yi said at a press briefing in Washington on July 11.
The PBOC will continue to ensure “stable and reasonably sufficient” growth in money supply and aggregate financing to meet the banking industry’s liquidity needs, an unnamed central bank official told the Xinhua News Agency.
The volatility in money-market rates last month was temporary and won’t pose a threat to the economy, the official said in Xinhua’s report datelined yesterday. Expectations that the U.S. Federal Reserve would start to taper its quantitative easing, cash demand during a Chinese public holiday, the need for banks to meet their reserve requirements and tax payment deadlines all played a role in causing the turmoil, he said.
--Zhou Xin. With assistance from Ailing Tan in Singapore and Feiwen Rong in Beijing. Editors: Nerys Avery, Scott Lanman
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