What China markets are thinking in December
“Times have changed.”
The most recent data from the PBoC and the CBRC show that bank asset growth hit a fresh all-time low in October. That means China is actually deleveraging – a little. It’s slow and slight, and done with a bit of trickery, but the debt load has shrunk in comparison to the size of the economy.
Since April, bank asset growth has averaged 10.9% y/y – falling into single digits in October at a rate of 9.4%. Just to reiterate – that is the slowest pace of bank asset growth on record. That fact is pretty remarkable. Meanwhile, the economy has grown by 11.1% since April, so the banking system has shrunk to 303.5% of GDP, from a recent high of 309.6% back in December 2016.
To us, it doesn’t look like the regulators are slowing down. A long, important article in the PBoC-run Financial News last week suggested that, going forward, the PBoC and CBRC will more actively use their recently created regulatory tools to tame the banking system further. For the central bank, that means macro-prudential assessments (MPAs) will increasingly focus on off-balance-sheet activity. For the CBRC, that means enforcing compliance with new regulations issued throughout 2017, which are meant to reduce speculative behavior in interbank lending, wealth management products, and off-balance sheet lending.
The rapid reduction of bank asset growth – from a recent high of 15.8% y/y in November 2016 to 9.4% in October of this year – underscores the success that regulators have had already. Since the beginning of 2017, the PBoC has been explicit in saying that it would employ MPAs to focus intently on the pace of asset growth at each financial institution – lo and behold, the pace of bank asset growth has dropped dramatically.
FIG 1: BANK ASSET GROWTH SLOWED DRAMATICALLY SINCE LATE 2016
Source: Wind info
Avoiding a liquidity crunch
We’ve never seen a downward trajectory for the growth of bank assets like the one that has prevailed over the past 12 months.
The fact that bank assets are growing at an all-time low is a considerable feat, but perhaps more importantly, this rapid reduction in overall bank asset growth has occurred at the same time that traditional loan growth has stayed robust – ranging from 12.9% to 13.2% y/y over the past seven months.
How did that happen? It’s because interbank leverage has been reduced in a way that has so far not challenged bank funding. The chart below shows that the growth of bank claims on other depository corporations (i.e. other banks) went into negative territory (on a year-on-year basis) in June 2017 and has stayed there since. Bank claims on other banks have reduced from a recent high of RMB 31.6 trillion in December 2016 to RMB 29 trillion as of October 2017 – an 8% reduction.
FIG. 2: BANK LOANS TO OTHER BANKS HAS GONE NEGATIVE, GROWTH, Y/Y
Source: Wind info
The growth of bank claims on other financial institutions (i.e nonbankfinancial institutions, or NBFIs) has not yet gone negative, but it has decelerated rapidly since October 2016, falling from 21.6% y/y to just 1.3% y/y in October 2017.
FIG 3. BANK CLAIMS ON NON-BANK FINANCIAL INSTITUTIONS ALSO DECELERATING RAPIDLY, GROWTH, Y/Y
Source: Wind info
These two series are key to tracking and understanding the slowdown in overall bank asset growth. They show that there has been significant progress in reducing interbank and inter-financial institution leverage over the past twelve months. That development has subsequently driven the slowdown in overall bank asset growth. And while the cost of wholesale financing has increased, the PBoC has had been more accommodative in the second half of 2017.
FIG. 4: PBOC LIQUIDITY INJECTIONS INCREASED IN H2 2017 (NET REPOS, RMB BILLION, CUMULATIVE)
Source: Wind info
So the deleveraging among banks and the concomitant higher money market rates have not led to a liquidity crunch, or hindered traditional credit creation. Liquidity has been expensive, but widely available. That mix has been the key to supporting bank funding during the financial deleveraging.