China's Economy：Money and Credit Growth Beats Expectations; the Central Bank might Slightly Rein in Its Pace of Monetary Loosening

15 Jul 2014 Please read the "Special Disclaimer" Section on the last page - 1 - Securities Research Report China’s Economy Money and Credit Growth Beats Expectations; the Central Bank might Slightly Rein in Its Pace of Monetary Loosening – Comment on June Money and Credit Data Data Commentary China's June credit growth exceeds expectations; social financing rose sharply. Chinese financial institutions issued RMB 1.08 Trillion in new yuan loans in June, above our and market expectations for ~RMB 900 Billion worth of new loans (Table 1), data from the People’s Bank of China (PBoC) showed today. Social financing grew even more rapidly and came to RMB 1.97 Trillion in June, up ~RMB 500 Billion from May. The rise in social financing was jointly driven by both on-balance-sheet financing and off-balance-sheet financing (Fig 1). Of off-balance-sheet financing, trust loans, entrusted loans, bill financing and bond financing all saw quite an increase in June. Although on-balance-sheet credit extension increased, growth in medium- and long-term loans eased from high levels. Total credit issued in June exceeds the level estimated based either on a full-year credit extension of RMB 10 Trillion or on seasonal patterns of previous years (Fig 2). However, in terms of different types of loans, growth in short-term loans accelerated, while growth in medium- and long-term corporate loans – which are directly linked to the real economy – eased slightly from high levels seen in the past few months. Meanwhile, mortgage lending to households was flat, with new mortgage lending staying at a level seen in the recent months (Fig 3). Off-balance-sheet liquidity rose sharply on the base effect, with undiscounted bills posting the most marked increase. Social financing was up RMB 932.5 Billion in June compared with the same month a year ago, with off-balance-sheet liquidity rising by nearly RMB 700.0 Billion, most of which was in the form of bank acceptance bills. The YoY increase in off-balance-sheet liquidity was primarily due to a low base brought about by the cash crunch in June last year (Fig 4). Still, in addition to the low base effect, the government's recent moves to loosen monetary policy, such as targeted easing, also contributed to the off-balance-sheet liquidity growth. Money growth beats expectations; liquidity injection has been strengthened. The year-on-year growth in M2 jumped to 14.7% in June from 13.4% in May, exceeding market expectations; M1 growth also picked up to 8.9% from 5.7% a month ago (Fig 5). The higher money growth rate was partly caused by a low base from June last year when M2 growth slumped to 14.0% from 15.8% earlier due to a cash crunch. However, judging from the contribution of different components of M2 to its 1.3-percentage-point increase in growth in June from May, the 1-percentage-point increase was contributed by demand deposits in M1, while the other 0.3-percentage-point increase was contributed by quasi-currency. Therefore, in addition to the base effect, the recent strengthening of liquidity injection, which makes M2 more liquid, also contributed to the country's faster money growth, as evidenced by the substantial rise in corporate demand deposits (Fig 6). With such high growth in social financing, the monetary authority might slightly rein in its pace of monetary loosening. The expansion in money and credit in June suggests that the real economy is getting increasing support from liquidity injection. As far as the trend of credit is concerned, credit extension for Contact: Yiwei Wang 010-58452070 wangyw@ebscn.com Contact: Nian Lin 010-58452071 linnian@ebscn.com Analyst: Gao Xu 010-58452002 gaoxu@ebscn.com Practice License Number: S0930512080004 2014-7-15 Macro Commentary Please read the "Special Disclaimer" Section on the last page - 2 - Securities Research Report full-year 2014 will come close to our estimate of RMB 10 Trillion, which is not low. However, the recent regulatory moves1 aimed at curbing interbank business indicate that regulators remain cautious about the expansion in off-balance-sheet financing. Therefore, the rapid expansion in off-balance-sheet financing in June might prompt the monetary authority to slightly rein in its pace of monetary loosening. Against such a backdrop, it is becoming less likely that the government will further loosen monetary policy lately. Data on funding sources for investment due to be released tomorrow is the most important indicator for judging the direction of monetary policy. The expansion in off-balance-sheet financing in June has placed pressure on the government as it seeks to implement loose