China is loosening, but there is really no rush

China is loosening, but there is really no rush

2012年01月13日 19:19:36

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　　“Monetary policy is being loosened, but only very gradually; there is no appetite for a repeat of 2008-09
 　　“The conservatives still appear to be in the ascendant, believing the economy needs further deleveraging
 　　“We expect further loosening as the economy continues to slow in Q1 and Q2
 　　Is China loosening monetary policy or not? While official policy remains “prudent? (稳健货币政策) and interest rates have not been cut, strong loan growth in December has gotten the market a little excited. The A-share market has rallied strongly, partly on expectations of monetary loosening, however gradual. The interest rate swap curve is pricing in quite a lot of loosening in 2012.
 　　Official actions and rhetoric have been mixed, as we outline below.
 　　Evidence that the authorities are keeping things tight:
 　　“Official monetary policy rhetoric is still “prudent?, after the debate in October-November, when some in Beijing were pushing for a looser stance. Senior officials have highlighted the danger of reflating the “virtual? economy (i.e., the property sector) and have pushed back against complaints that money is too “tight?, saying it is more a question of where the available credit goes than the total amount available.
 　　“Official bank interest rates have not been cut - though, as we argued in 2011, this is one of the last things to happen in a loosening cycle.
 　　“Interbank and draft discount rates (widely used by small and medium-sized firms to finance trade) are still at relatively high levels. We show discount rates in Chart 1.
 　　“As China?s inflation rate falls, real administered lending rates have risen - based on the average of the CPI and PPI inflation rates, real 1-year loan rates rose to 4% in December 2011 from 0% in Q2 and Q3. We show this in Chart 3.
 　　

 　　

 　　Evidence that they are loosening:
 　　“The required reserve ratio (RRR) was cut once by 50bps in December, and the market is convinced that another cut is coming in the next week or two.
 　　“December loan growth was CNY 640bn, the biggest monthly advance since April 2011.
 　　““Real? CNY loan growth (i.e., nominal loan growth adjusted for inflation) is accelerating again, as Chart 2 shows. We assume CNY loan growth of CNY 8.5trn in 2012.
 　　“Window guidance from the central bank on Q1-2012 loan growth is reportedly quite relaxed. It appears that the loan “quota? for 2012 has yet to be set and/or communicated. The People?s Bank of China (PBoC) is keeping its options open and has reportedly signalled that it will continue to use differentiated reserve requirements to keep misbehaving banks in check.
 　　Other recent actions by the PBoC can probably be interpreted as technical actions designed to avoid a pre-Lunar New Year liquidity crunch:
 　　“The PBoC instituted a new reverse repo facility in the run-up to the Lunar New Year, a move engineered to avoid the interbank squeeze that took place before the holiday in 2011 (corporates and households make net cash withdrawals from the banking system for the holiday). As a result, banks have an increased desire for cash holdings, which has absorbed the impact of the lower RRR.
 　　How to understand all of this
 　　China?s economic cycle has just turned. Growth finally slowed more noticeably in Q4-2011, and inflation is now on a clear downtrend (we forecast 3.9% y/y for December 2011). Policy makers need some time to react to this.
 　　The authorities are clearly still trying to navigate between the twin dangers of over-stimulating the economy again and causing the current slowdown to sharpen dangerously. Holding the line on “prudent? policy is evidence of the former; the lack of a clear loan growth target for 2012 (and relaxed guidance for Q1) is evidence of the latter.
 　　

 　　

 　　But this is not just about waiting for the data to show where policy should go. Many officials are of the view that the economy needs to be deleveraged and China needs to get used to a slower growth rate - a view that dictates against relaxing credit growth. This view still appears to be holding sway. But as job growth, local government finances and overall sentiment suffer, some loosening will be needed. For instance, real export and import growth continued to decelerate in December, to 3.4% y/y and 1.8% y/y, respectively, pointing to weaker demand. We expect the slowdown and the policy reaction to happen gradually over the next few months.
 　　Another moving part in this mix is “total social financing? (TSF). TSF added significantly to overall liquidity in 2010 and 2011. However, since Q3-2011, TSF growth has slowed thanks to administrative controls, and this trend probably continued in Q4 (Chart 4 shows the TSF trend through Q3-2011). Many expect trust financing of real estate, for instance, to suffer in Q2-2012, when a large number of products being redeemed may not be allowed to be reissued. However, administrative constraints on TSF financing could be loosened as well, depending on how the authorities perceive the balance of risks.
 　　Overall, we believe that China has begun loosening. But because the macro-economy is not yet showing signs of severe distress, this is a gradual and data-dependent process, and those who want to force deleveraging are still exerting influence. While a “big bang? is unlikely, we expect a moderately looser monetary stance to become apparent as growth concerns rise and inflation continues to fall.
 　　The market appears to be expecting 2012 loan growth of CNY 8.0-8.8trn. We guess that the figure will end up at around CNY 8.5trn, with “real? loan growth accelerating in
 　　H1 and decelerating in H2 (Chart 2). We do not believe this is excessive, though we understand that a loan target above CNY 8trn may strike some policy makers as “loose?. Loan growth of CNY 8.5trn would translate into a nominal increase of 15.5% y/y, compared to 14.3% in 2011, 20% in 2010 and 32% in 2009. A mild pick-up in credit growth strikes us as reasonable when the authorities have beaten inflation and forced some deleveraging, and then need to support economic activity again. This should be mildly positive for China equities, and should help growth momentum pick up again by Q2.
 　　All eyes will be on the January loan number, though with Lunar New Year falling in the last week of the month, interpreting the amount will be tricky. We provisionally look for CNY 700-800bn, which we believe would signal that relatively strong credit growth will be the story for H1.
 　　 

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