Asia Cross Current CLIFF TAN East Asian Head of Global Markets Research Global Markets Division for the East Asian Region T: +852 2862 7005 E: cliff_tan@hk.mufg.jp Bank of Tokyo-Mitsubishi UFJ A member of MUFG, a global financial group FX Daily Snapshot CNY/CNH Another Deeper Dive into Chinese Credit, Money and Prices 13 March 2018 Key Points: Chinese credit slowed in February Much more important is we have enough data to confirm actual (as opposed to trumpeted) de-leveraging, from the end of the Party Congress To de-leverage as in 2013 would mean another two years of this But within a few months, serious de-leveraging should lead to slowing in Chinese growth Policymakers will then have to decide whether to de-risk or revive growth Some February money #s too neat to be true CPI inflation spurted higher but underlying price pressures contained PPI inflation slowed, possibly suggesting slower smokestack growth ahead We take another deeper dive into (Friday) Chinese data, similar to what we did in Asia Cross Current: CNY/CNH Caixin Zigged while NBS/CFLP Zagged, 8 March 2018. Credit Chinese credit slowed in February Much more important, evidence in the past four months seem conclusive trend credit growth is slowing That should mean some real slowing in the economy soon Something immediately changed after the Party Congress China s February credit/money numbers showed: Total Social Financing 1 /new bank loans = CNY1,170bn/CNY839.3bn < last upwardly revised CNY3,060.3bn/CNY2,900bn. For us, key impressions were: 1) Signs continue that after talking deleveraging throughout 2017 with little evidence to show for it, since the October 2017 Party Congress ended technocrats put in charge are actually deleveraging. 2) But the scale of de-leveraging so far can still be reversed in just a couple of months but if de-leveraging continues, we should begin to see evidence of its effects in slowing real indicators soon (again, see our 8 March ACC). For de-leveraging, we tend to look at 12-month growth trends to get away from seasonalities (including those for Chinese New Year). Authorities were keen to guide that January-February data this year should be (especially?) read together because of the Chinese New Year timing effect (holiday in February this year but January in 2017): *PBOC:JAN.-FEB. LOAN DATA SHOULD BE READ TOGETHER DUE TO HOLIDAY (Bloomberg). In the chart overleaf (which we've used a number of times before), bars are 12-month rolling sums of TSF shown on a log scale, so there is depicted a trend growth arrow we'd originally drawn from later 2015 and which hasn t been moved since. 1 Chinese authorities no longer use the TSF terminology but now call it aggregate financing to the real economy, but we choose to stay with the older terminology for the sake of continuity with prior published work. 1
CHINA TSF: THE GROWTH TREND HAS BROKEN Source: CEIC, MUFG Bank Which looks very different than last year The only caveat is unobserved dark matter in Chinese credit By May, China s policymakers may have to decide between slower growth and de-risking No slowdown in bank lending, though One can immediately understand the reason for our skepticism last year when all the rage was of "de-leveraging" and yet the trend rate of TSF growth never budged. To us, seriously de-leveraging would be something like what we saw between mid-2013 to mid-2015, when trend TSF growth reversed course and became negative. With now four months of data accumulated since the Party Congress ended it is apparent technocrats in charge are beginning to undertake actual de-leveraging as the trend of trend growth has become negative; actions speak louder than words. The main caveat we'd add to this, though, is that for about two years, we no longer have believed Total Social Financing is total; ie, we suspect there are other pools of credit that exist outside of official counting. This is very reminiscent of what occurred at the start of this decade, when new shadow banking products forced officials to start reporting not only new bank lending, which used to be the main credit #, but a much broader aggregate called TSF. As a joke, we sometimes now refer to TSF as Somewhat Total Social Financing. At some stage, we anticipate that Chinese authorities may have to introduce a new Total TSF to take account of further innovations and newer products in China's financial system. Our expectations from the end of last year (eg, both the December 2017 and February 2018 issues of the Foreign Exchange Outlook) was for a new policy tact (controlling risks) to continue for about six months, say into May 2018. At that stage we also expect actual de-leveraging to have led to some slowdown in growth and key indicators and the key question for China's policymakers then will be whether they can tolerate growth costs in order to de-risk (one of the top three top leadership goals this year). The jury remains out. On the now rather old-fashioned new bank lending figures, there's no evidence to our eyes growth trends have been slowed since the Party Congress (chart overleaf). Money Suspicious M1/M2 growth rates in February China also reported February money #s Friday, M0/M1/M2: 13.5%YoY/8.5%/8.8% > consensus 7.6%/11.0%/8.7% > last -13.8%/15.0%/8.6%. LNY timing effects are here obviously but we're suspicious of reported February M1/M2 growth rates. Because in each the implied %2Y growth rates were identical in both January and February, at 2
31.7% and 8.6%, respectively. Ie, pick a 2-year growth rate and decide what February %YoY growth rates you need to report to make January-February 2-year growth the same. We could, as authorities had urged, make judicious allowances for LNY timing effect in our analyses; or the authorities can just do that for us. CHINA NEW BANK LENDING: STILL GROWING Source: CEIC, MUFG Bank Prices Headline CPI inflation spiked in February And CPI tends to lead PPI China s two main February inflation measures, CPI/PPI, were reported out as: 2.9%YoY/3.7%; consensus was 2.5%/3.8%; last 1.5%/4.3%. Almost exactly a year ago in Asia Cross Current: CNY - China's Inflation Will Remain Benign But Won't Comfort Bond Yields, 7 March 2017 we said in our experience, it's more likely China PPI will follow CPI rather than the other way round; here's a history since 2010. IN CHINA, PPI TENDS TO FOLLOW CPI Source: Bloomberg, MUFG Bank 3
We think last year was a good demonstration of what we meant. But the rise in consumer inflation seems 1-off On CPI, though February headline is markedly faster, the underlying pace of consumer price changes does not seem all that changed to us. Though this headline rate may remain elevated another month or two, we still expect CPI inflation to stay well contained within the government's 3% cap for 2018. Our continuing thesis for CPI in China, for this and next year, is consumer price inflation will be constrained by two forces: i) Advances in improving the efficiency of the food supply chain, eg in pig husbandry; and, ii) the Alibaba effect, analogous to the Amazon effect. PPI inflation slowed, implying possible slower smokestack growth ahead We had actually been a little more interested in the PPI side, since we considered the rebound of global commodity/materials prices as key behind the recovery of China's smokestack industries from later 2016 on. CHINA: CAIXIN MANUFACTURING PMI VS. CFLP INPUT PRICES Source: MUFG Bank A correlation that has re-appeared in the official PMI In the chart above (which we had previously used) we had noted a dip in the input price sub-diffusion of the official CFLP manufacturing PMI during the first 1/3 of 2017, which we thought had been captured in the quasi-private Caixin/Markit manufacturing PMI last year but which wasn't captured well at all by the official NBS/CFLP measure. Our guess from last year was whatever dip there had been in commodity/materials prices in China in 1H17 was simply smoothed out of the official PMI. CHINA: NBS/CFLP MANUFACTURING PMI AND INPUT PRICES Source: Bloomberg, MUFG Bank 4
Though Caixin is now weirdly upbeat But now official PMI and its input price sub-diffusion seem to be moving together again. That still begs the question of why the Caixin measure now seems so much more upbeat, particularly as it's known to cover smaller companies which don t seem to be faring nearly as well as larger enterprises in the official survey. So far as we know, this boost is also not coming from better pricing conditions in commodities/materials nor is it above coming from credit. On external demand, though February export growth was a HUGE surprise, in the 8 March note we had earlier noted declines in new export orders in the PMI measures. So, watch this space. Disclaimer This document has been prepared by The Bank of Tokyo-Mitsubishi UFJ, Ltd. (the Bank ) for general distribution. It is only available for distribution under such circumstances as may be permitted by applicable law and is not intended for use by any person in any jurisdiction which restricts the distribution of this document. The Bank and/or any person connected with it may make use of or may act upon the information contained in this document prior to the publication of this document to its customers. Neither the information nor the opinions expressed in this document constitute or are to be construed as, an offer, solicitation, or inducement or recommendation to buy, sell or hold deposits, securities, futures, options or any other derivative products or any other financial products. This document has been prepared solely for informational purposes and does not attempt to address the specific needs, financial situation or investment objectives of any specific recipient. This document is based on information from sources deemed to be reliable but is not guaranteed to be accurate and should not be regarded as a substitute for the exercise of the recipient s own judgment and research. Historical performance does not guarantee future performance. All views in this document (including any statements and forecasts) are subject to change without notice and none of the Bank, its head office, branches, subsidiaries and affiliates is under any obligation to update this document. The information contained in this document has been obtained from sources the Bank believed to be reliable but the Bank does not make any representation or warranty nor accepts any responsibility or liability as to its accuracy, timeliness, suitability, completeness or correctness. The Bank, its head office, branches, subsidiaries and affiliates and the information providers accept no liability whatsoever for any loss or damage of any kind arising out of the use of or reliance upon all or any part of this document. The Bank retains copyright to this document and no part of this document may be reproduced or re-distributed without the written permission of the Bank. The Bank expressly prohibits the distribution or re-distribution of this document to private or retail clients, via the Internet or otherwise, and the Bank, its head office, branches, subsidiaries and affiliates accept no liability whatsoever to any third parties resulting from such distribution or re-distribution. Disclosure applicable to BTMU s London branch only: The Bank of Tokyo-Mitsubishi UFJ, Ltd. ( BTMU ) is a limited liability stock company incorporated in Japan and registered in the Tokyo Legal Affairs Bureau (company no. 0100-01-008846). BTMU s head office is at 7-1 Marunouchi 2-Chome, Chiyoda-Ku, Tokyo 100-8388, Japan. BTMU s London branch is registered as a UK establishment in the UK register of companies (registered no. BR002013). BTMU is authorized and regulated by the Japanese Financial Services Agency. BTMU s London branch is authorized by the Prudential Regulation Authority (FCA/PRA no. 139189) and subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of BTMU London branch s regulation by the Prudential Regulation Authority are available from us on request. 5