Credit Creation Plummets In Sign Of Renewed Economic Weakness

New total social financing (TSF, the broadest measure of money supply and a proxy for credit creation) in China plummeted in July to its lowest level since October 2008, dropping to just CNY273.1bn versus CNY2.0trn in June. The result confounded consensus expectations for new credit creation of CNY1.5trn, and represented a remarkable 66.7% year-on-year (y-o-y) retreat. We believe that weakness in credit creation likely suggests that China's transitory economic pick-up over recent months is losing steam, and continue to expect a renewed slowdown as H214 progresses.

Our expectations have been corroborated by fixed asset investment (FAI) growth, which despite easing credit conditions in the months prior to July has failed to witness a noteworthy pick-up. Instead, after stabilising over the past three months, FAI growth hit a fresh 12-year nadir in July at 17.0% y-o-y. Given the state of China's fast cooling property market, this suggests that the People's Bank of China's (PBoC) efforts to lower borrowing costs by providing additional liquidity to credit markets and pushing banks to provide preferential lending for first-time home buyers has so far failed to spur demand for new credit.

Faster Credit Growth A Must To Hit 2014 Growth Target

Hitting Fresh Lows
China - New Total Social Financing (TSF), CNYbn (LHS) & Fixed Asset Investment, % chg y-o-y

New total social financing (TSF, the broadest measure of money supply and a proxy for credit creation) in China plummeted in July to its lowest level since October 2008, dropping to just CNY273.1bn versus CNY2.0trn in June. The result confounded consensus expectations for new credit creation of CNY1.5trn, and represented a remarkable 66.7% year-on-year (y-o-y) retreat. We believe that weakness in credit creation likely suggests that China's transitory economic pick-up over recent months is losing steam, and continue to expect a renewed slowdown as H214 progresses.

Hitting Fresh Lows
China - New Total Social Financing (TSF), CNYbn (LHS) & Fixed Asset Investment, % chg y-o-y

Our expectations have been corroborated by fixed asset investment (FAI) growth, which despite easing credit conditions in the months prior to July has failed to witness a noteworthy pick-up. Instead, after stabilising over the past three months, FAI growth hit a fresh 12-year nadir in July at 17.0% y-o-y. Given the state of China's fast cooling property market, this suggests that the People's Bank of China's (PBoC) efforts to lower borrowing costs by providing additional liquidity to credit markets and pushing banks to provide preferential lending for first-time home buyers has so far failed to spur demand for new credit.

Faster Credit Growth A Must To Hit 2014 Growth Target

In light of the increasingly credit-intensive nature of Chinese economic growth, it is highly unlikely that the economy will be able to hit the government's target of around 7.5% economic growth this year without substantially stronger credit growth. In consideration of increasingly confident rhetoric from top government officials (including Li Keqiang) over recent months, this suggests that the PBoC will continue to ease credit conditions over the coming months in an effort to achieve this year's target, most likely by providing additional liquidity to the system and potentially making broader reserve ratio requirement (RRR) cuts. As such, we believe that the badly-needed, substantive reform of China's credit markets is unlikely to take shape until at least 2015, when we expect the government to set a more modest growth target in line with its longer-term reform objectives. We remain below consensus on 2014 real GDP growth, with a forecast of 7.3%.

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Related sectors of this article: Economy, Monetary Policy
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