Some Thoughts on Chinese Financing Growth: Playing Whack a Mole
The focus on the recent strong growth in headline financing growth has raised concerns about underlying demand for credit and continued reliance on investment to drive growth. However, the headline data fails to capture the important underlying trends that are important grasp the change in Chinese financing.
Beginning with the aggregate YTD changes in financing, in Figure 1, we actually see that most types of financing are up strongly. Only two categories of financing are down in 2016. Undiscounted bankers acceptance and foreign currency loans are down YTD in 2016 in absolute terms.
Virtually all of the decline in aggregate financing to the Chinese has come from the decline in bankers acceptance. All other sources of financing are up robustly to strongly. What makes this precipitous drop in bankers acceptance notes is the lack of evidence as to where it is going. Bankers acceptance should be used as a type of receivable’s financing. Consequently, if the outstanding amount of bankers acceptance is falling so rapidly, we should see a corresponding drop in outstanding receivables, however, there has been no drop in receivables. In fact, net receivables according to official statistics are up year to date 9.4%. This makes the supposed drop in bankers acceptance rather puzzling.
If we plot this on to growth in various forms of financing growth, RMB loan figures which grow very closely to the total financing numbers are the smallest number with other forms of financing exploding.
For instance, the combination of trust and entrusted loans have more than doubled through August from the same period in 2015. Foreign currency loans, as a share of the total new financing in 2016, have dropped by an almost insignificant amount. While this has a not insignificant impact on FX related flows and pressures on RMB, it is almost irrelevant to the stock of financing in China. Foreign currency loans dropped by 412 billion RMB against total new financing YTD of 11.75 trillion RMB or only 3.5%.
It may be possible, though we have no hard evidence to support this, that the decline in bankers acceptances are being made up for increases else where in the total pool of finance. The total absolute increase excluding bankers acceptances and loans comes very close to matching the absolute decline in bankers acceptances. If we sum trust, entrusted, bond, and stock financing change from August YTD 2015, we have a number of 2 trillion RMB compared to the decline in bankers acceptance of 1.8 trillion RMB. If this is what is happening, this appears to signal that a lot of bank based capital is being shifted into non-bank financial institution lending.
Given that total lending in 2016 to non-bank financial institutions has totaled 1.8 trillion RMB, nearly matching the decline in bankers acceptance, there is some reason to believe that banks are shifting their lending practices to meet new regulatory requirements about bankers acceptances. Again, we cannot say this for certain, but there is some evidence that indicates it may be happening.