China Credit Surge Fuels Economic Stabilization, Debt Concerns

  • Aggregate financing topped all but 2 of 28 economist forecasts
  • IMF paper warned of credit risks if overcapacity not addressed

China’s broadest measure of new credit exceeded estimates in September to fuel the economy’s continued stabilization and at the same time underscore escalating concerns over a property binge and the pace of debt expansion.

Key Points

  • Aggregate financing was 1.72 trillion yuan ($255 billion) last month, compared with median estimate of 1.39 trillion yuan in a Bloomberg survey 
  • New yuan loans stood at 1.22 trillion yuan 
  • Broad M2 money supply rose 11.5 percent from a year earlier

Big Picture

With a credit-binge having succeeded in stabilizing the economy, policy makers are switching focus to reining in soaring home price gains that cheap borrowing costs have spurred. China urgently needs a plan to address a build up of corporate debt that’s manageable but with a window to address it "closing quickly," according to an International Monetary Fund working paper.

Economist Takeaways

"The government is in a dilemma: if they tighten the real estate sector too much, the economy could turn down sharply; but if they don’t control it, they’ll allow the bubble to expand," said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. He expects a sharp slowdown in credit expansion in October.

"It’s more of the same: more yuan lending, more debt, no real increase in M2 growth and a much larger rise in M1 growth," said Michael Every, head of financial markets research at Rabobank in Hong Kong. "It screams ’Liquidity trap!"

“The property frenzy will certainly limit the PBOC’s appetite for further easing," said Raymond Yeung, chief greater China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong. "While it is too early to call for tightening, deleveraging is certainly an ongoing theme" in the fourth quarter.

"While credit growth remains rapid relative to a couple of years ago, it has been slowing in recent months," Julian Evans-Pritchard, economist at Capital Economics in Singapore, wrote in an e-mail. "Broader worries about credit risks means further monetary easing is unlikely. It will take time for this more cautious policy stance to impact economic growth."

"Beijing talks about controlling credit but allows the banks to increase loans," said Andrew Collier, an independent analyst in Hong Kong and former president of Bank of China International USA. "The official message is not the same as the reality. Pressure from the banks for profits, from corporates for loans, and from local governments for revenue from the property sector is driving the Chinese economic bus more than the policy makers in Beijing."

The Details

  • Gross domestic product data due tomorrow is likely to show the economy expanded 6.7 percent in the three months through September, the third straight quarter at that pace, according to economists surveyed by Bloomberg
  • Entrusted loans, trust loans and undiscounted bankers’ acceptance bills -- which collectively give a glimpse of shadow financing -- remained subdued
  • Foreign currency loans growth declined 9 percent from year earlier, with 26.3 billion in new foreign currency loans

— With assistance by Yinan Zhao, and Kevin Hamlin

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