Focusing on Obscure Chinese Data: The Importance of Banker’s Acceptances
Most of the numbers grew robustly, as is always expected with this specific release, but there were two numbers that I wanted to highlight because of what they mean for other issues.
First, new RMB loans in China were up 9% YoY and 16% YTD YoY. This represents the ongoing rapid expansion of credit in China that at best seems unsustainable at worst reckless. Despite talk of restricting credit expansion, credit is growing more than twice as fast as GDP in percentage terms and four times faster in absolute terms. There are significant concerns about the ongoing sustainability of this rate of credit expansion.
Second, the most unexpected number was the collapse of undiscounted banker’s acceptance notes. To put the size of the decline in some context, since this specific data point has been collected beginning in 2002, there has never been a decline of this magnitude. As another point of comparison, New RMB Loans were up 937 billion RMB while banks acceptances declined 507 billion RMB. This would represent 54% of all loan growth or 77% of aggregate financing to the real economy.
I believe this number is distorted to this magnitude for a couple of reasons which have very real implications. Banker’s acceptance are used in China in primarily two ways, both of which could be targets for regulators. One way they are used to disguise the true level of debt by making sales then using banker’s acceptance to access liquidity. It is not uncommon for sales to be fake, returned at a later date, used for other forms of capital, and a variety of other issues.
If banker’s acceptances fell by such a large amount, this would imply wide spread repayment by firms of their outstanding banker’s acceptances. If this is what is happening, which I do not believe is the most likely scenario, this would imply that cash flow throughout the economy has dramatically improved as the year has progressed. While I noted what appeared to be continuing stabilization and some increase of output, the size of this drop appears much larger than I would expect from output gains. Further, given the continued increase in aging of corporate receivables and payables, it is difficult to see how this would match that number. While it is possible BA’s may be collapsing due to improved cash flow, liquidity, and real economic activity, I believe this is the less likely scenario.
The other primary way BA’s are used is to facilitate international trade and most importantly capital outflows. Just as with the previous method, many trades that present BA’s are non-existent, overstated, or misinvoiced to name a few ruses used. However, now there are additional layers of complexity added. To take a simple example, the Chinese exporter may move capital Hong Kong to either arbitrage between the CNY and CNH or deposit it in a higher interest rate instrument before returning the RMB back to China. More worrying however, is when the capital is designed to leave China permanently. In this case, a BA is used to pay for, in this instance, $100 of imports that either non-existent or overstated and the BA is paid off with domestic capital allowing quasi capital flight. Given the widely acknowledged discrepancy between Customs and Bank reported imports, this is not an insignificant problem.
Therefore, the drop in banker’s acceptance means not that credit is suddenly falling but more likely that banking regulators are cracking down on capital flight into and out of China. Given the narrowing of the gap between Customs and Bank reported imports, this seems the more likely scenario. Anecdotally there are increasingly widespread reports of inability of firms to engage in standard business transactions that involve international payments. Finally, there is clear evidence that the PBOC or state run banks, actively sitting on FX trading and related derivatives with a specified price target.
Given the rapid increase in outflows YTD in 2016 with the accompanying collapse in inflows, this would imply that Beijing is giving increasing priority to trying to reduce this divergence and prevent further RMB price pressures. Given the wealth of data, it is more likely the continued drop in BA’s related to capital outflow worries rather than repayment of payables.