The recent tightening of credit we have seen in China is primarily aimed at clamping down
on shadow financing. Wealth management products have rapidly grown in size, from only
8% of total banking deposits in 2012 to over 20% today.
The top chart shows China’s banks’ claims on non-banks, which is where a lot of shadow financing shows up. As we can see, growth in this category has fallen precipitously from 70% YoY to 20% today.
However, there is collateral damage from this tightening. For one, bank-lending rates are starting to rise as their cost of funding rises (bottom-left chart). Policymakers in China want to confine the rise in rates in to the interbank market, but this a next-to-impossible task. Too great a rise in lending rates would feed negatively into the real economy.
Moreover, as the bottom-right chart shows, tightening has led to broad credit growth falling to near to 0% on a 3-month basis. A negative second derivative in credit must be watched for any inhibitive effects it may have on economic growth – especially in a country so heavily credit-dependent such as China. A negative first derivative in credit, as we are on the cusp of today, leaves economic growth even more fragile.
I don’t agree with VP analysis on everything, but I do agree on most things. I find this report spot-on.
China has an impossible task of slowing its shadow banking sector running rampant and maintaining growth.
I do not know what China will ultimately choose, but something has to give one way or another.
China’s unpleasant choice is a bubble bust now or a bigger bubble and a bigger bust later.
By the way, the Fed faces a similar unpleasant choice, as do central banks in general. Asset bubbles are everywhere.
Mike “Mish” Shedlock