No signs of credit restraint in China
Andrew Collier | Mar 24, 2021
There is widespread talk within Beijing following the leadership meetings about a return to lower credit growth following years of excesses. This is being echoed by the western media. The Financial Times just published a piece saying that Xi Jinping is “curbing the credit fuelled excesses of the past decade.” However, the data does not yet indicate a decline in credit. Instead, there is a continued effort to de-risk the financial system, reduce the influence of large conglomerates such as Alibaba, but not touch the bulk of credit supply. This may change with March’s data but it is not yet apparent.
The credit crackdown “narrative”
As the Financial Times noted in an article published on March 18:
“The campaign initially focused on P2P platforms and other components of China’s once rampant shadow banking sector — the off-balance sheet activities that financial institutions used to funnel credit to borrowers, especially those in the private sector who found it difficult to borrow directly from banks. It has since been extended to internet finance and property. Some analysts warn that in curbing the credit- fuelled excesses of the past decade, Xi and Liu risk an overcorrection that could stifle innovative areas of financial activity and, ultimately, economic growth. From 2016 to 2019, the average annual increase in China’s corporate bankruptcies exceeded 30 per cent.”
Policy makers are intent on demonstrating their commitment to credit restraints. Guo Shuqing, Chairman of the China Banking and Insurance Regulatory Commission said this month: “From a banking and insurance industry’s perspective, the first step is to reduce the high leverage within the financial system.” Speculation in the property market is “very dangerous”, and bubbles in U.S. and European financial markets “may soon burst,” according to press reports.
At an economic conference, Influential PBOC advisor Ma Jun said noted the existence of asset bubbles in the stock and property markets and proposed a shift in monetary policy. He blamed changes in liquidity and debt for China’s stock rally last year and and home price increases in Shanghai. “Whether these issues may worsen depends on whether China will shift its monetary policy appropriately this year. These problems will continue if monetary policy remains unchanged, causing bigger economic and financial risks in the medium to long term,” he was quoted in the press as saying.
Is the government serious this time about tightening?
The numbers tell us credit growth will continue
Below is a rough estimate of various forms of credit and their growth trajectory. The lion’s share consists of bank loans. Since there is no forecast of this, I have used the February 2021 growth rate of 12 percent. This certainly could be modified down but we have yet to see this happen. The other area that is uncertain is local government debt. Since much (but not all) consists of bank loans, there is some double counting. Still, the overall trend suggests continued credit growth into 2021. None of the official targets indicate substantial declines – yet.
The government has not significantly altered its response to the economic slowdown through a large decrease in interest rates or an increase in M2. M2 rose 10.1% in February 2021 compared with 8.8% in February 2020, while the Seven Day Shanghai Interbank Rate is up marginally, to 2.23 percent compared with 2.15 percent a year earlier.
The budget deficit has increased steadily since at least 2007. The rate of increase recently is higher but the trend is clear. China did lower its target this year to 3.2 percent of GDP in 2020 from 3.6 percent in 2020. But that was a decline of just 2.7 percent to US$560 billion from US$576 billion.
Also, if we look at bank balance sheets, the growth was 10.7 percent in 2020. If that trend continues, on a much larger asset base, then this is another sign of credit growth.
Similarly, the data we can examine for state banks, large and small, show significant credit growth in both Q4 2020 with a slight decline for Q1 2021. However, that Q1 increase of 8.8 percent for large state banks and 11.8 percent for small ones is higher than nominal GDP and does not indicate credit restriction.
It helps to look at individual balance sheets. Here is an example of where the credit has been going, at least from bank lending. Angang Steel, one of the country’s largest steelmakers, enjoyed a 17.6 percent increase in long-term loans in 1H 2020. The steel sector was key to stimulus investment in 2020.
- Receivables days actual fell from March 2019 to March 2021 for the universe of all listed firms in China.
- Receivables days rose for both the steel and construction sectors. We can speculate that as construction boomed, the companies had ample credit and were able to extend payment terms to their customers.
Conclusion: No indication yet of lower credit growth
The 2020 stimulus was focused on construction and steel – the two classic areas of fixed asset investment growth. The PBOC and some senior leaders constantly talk about the danger of excess debt and credit bubbles. Action, though, has to be filtered through the state council, and the local provinces, which are ultimately responsible for growth. While there is some credit moderation, the signs do not yet suggest a significant decline and possibly even no decline compared with 2020. That could change with March or April’s data.