Monday, May 6, 2013

China' weak credit transmission

China is awash with liquidity. New domestic bank loans have seen some of the strongest growth in years and broad money supply is increasing at nearly 16% per year. Furthermore, property loans have risen 16.4% from the previous year to 13 trillion yuan ($2 trillion).

Source: FocusEconomics

 The increased liquidity is now visible in China's money markets, with short-term interbank rates declining in recent months.

Source: SHIBOR

Capital is also pouring in from abroad as investors attempt to escape the zero-rate environments many developed nations are facing. The demand for yuan has been quite strong, driving CNY to new record highs.

CNY per one dollar - spot rare
(chart shows CNY appreciating/dollar depreciating; source: Bloomberg)

In the past, improved credit/liquidity conditions would result in stronger economic activity, particularly in manufacturing. That's no longer the case.

Source: HSBC/Markit

It seems that China has caught a developed nations' disease in which stimulus no longer translates into improved growth. As was the case in the Eurozone (see discussion), China is suffering from what economists call "weak monetary transmission", a condition in which credit/liquidity is not getting to the areas of the economy where it's most needed (and in some cases there is simply no demand for credit).
DB: - The divergence between hard economic data and the enormous expansion of liquidity since the beginning of the year suggests that credit transmission mechanisms have broken down and the chances of a credit crunch are growing.
DB calls this the "law of diminishing returns" - more credit doesn't mean stronger growth:

Source: DB

All this liquidity (which started last year - see post) may have avoided a "hard landing", but the bet on China's stimulus nurturing a renewed growth spurt has not worked out so far.
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