China has instituted several targeted stimulus measures designed to improve GDP growth and provide capital for small businesses, the country’s largest employment sector. These measures, however, are likely to be inadequate compared with the decline in capital due to the restrictions imposed on shadow lending. The results are likely to be:
- Difficulty maintaining land sales, which are already declining.
- A potential downward trend in the property market.
- Defaults of property developer bonds.
- Continued rise in defaults of local SMEs.
The key point is Beijing is responding to tighter credit conditions by picking winners and losers. It is lowering credit to certain regions in order to restrict the allocation of capital. While official policy via the Peoples Bank of China (PBOC) can affect credit flows, the political system has a significant say in how the process works out. And we are seeing a distinct preference in those allocation decisions.
These measures are likely to provide less of a stimulus than the capital that was raised by the shadow banking system prior to the earlier crackdown. Newly increased RMB loans only amounted to RMB 1.8 trillion, not enough to compensate for the decline of RMB 6.5 trillion in shadow banking, which is more than three times larger. Although loan growth remained steady at 13%, total social financing has slowed to 9.8% from 14% a year ago. The chart below shows the decline in non-bank lending through mid 2018.This figure only includes “official” shadow lending, such as Trusts, and does not include other forms of non-bank lending such as wealth management products, which have seen flat growth even though the outstanding amount remains high at around RMB 30 trillion.