Faulty transmission

Philip Grant writes for Almost Daily Grant observer….

Some eye-catching credit data out of the People’s Bank of China today: Total credit grew by a record RMB 2.8 trillion ($420 billion) in March, far above the RMB 1.85 trillion consensus estimate. During the first quarter, total new financing ballooned to RMB 8.2 trillion, up 40% from a year ago and equivalent to 9% of China’s reported 2018 GDP. Extrapolated to a full year, the credit expansion is just behind the 40% jump in total financing as a percentage of GDP seen in the massive stimulus year of 2009.     That liquidity surge coincides with a “recovery extending across both sectors and geographies, with every major sector and each one of our regions showing better revenue results than Q4,” according to the China Beige Book.    Beyond opening the credit spigots, Beijing is trying to stoke economic growth in other ways. Last week, Xinhua’s Economic Information Daily reported that policymakers are crafting tax cuts and other fiscal policies to help spur consumption. In addition, the National Development and Reform Commission announced Monday that small and midsize cities (populations of between one and five million) will relax hukou, or household registrations, in a bid to boost real estate markets.    Regulators have also targeted the stock market. Bloomberg reports that nearly 700 firms bought back stock between December and January after authorities relaxed rules around the practice, up from 609 corporate buybacks in 2018 through early November. Mark Huang, analyst at Bright Smart Securities, explained to Bloomberg that: “China is looking to developed markets like the U.S., where buybacks are a key approach to sustaining a long-term bull market.”    Those exertions are bearing fruit, if asset prices are any guide. Thus, China’s Shanghai Composite Index has ripped higher by 28% year-to-date, while contracted project sales from an index of nine property developers jumped 20% in March, according to data from Bloomberg. That follows a 9.4% year-over-year advance in February property investment according to the National Bureau of Statistics, the hottest reading since 2014.    But the stimulus barrage has yet to translate into much acceleration in the money supply (M2 grew at 8.6% year-over-year, up from 8.3% average growth in 2018 but far below the 16% average since March 1996), nor improve the balance sheets of China’s debt-soaked corporations. S&P Global Ratings cut its assessment of 13 companies in the first quarter, the highest level of downgrades since 2016, with analyst Cindy Huang noting that “despite a slew of easing measures from the policy makers, small private firms still lack sufficient liquidity.” Peer Fitch Ratings has issued 30 corporate downgrades year-to-date, compared to just five upgrades. That follows a jump in yuan-denominated debt defaults to RMB 119.6 billion last year according to Singapore-based DBS Bank, four times 2017’s level.    With RMB 2 trillion of bad debt sitting on Chinese bank balance sheets according to research from UBS Group A.G., things are likely to get worse before they get better. A survey of 202 bankers conducted by China Orient Asset Management Co. finds that 83% of respondents believe that bad loans will increase in 2020.   

Why that disconnect between free flowing liquidity and rising corporate distress?  Zhu Min, head of Tsinghua University’s National Institute of Financial Research and former deputy governor of the PBoC, told Caixin that while a decade of easy money has goosed financial markets, stimulus has not helped larger banks adequately lend to smaller companies which need liquidity and can often offer little collateral. Zhu asks: “How can financial institutions lend money to small-to-micro companies if all of their money has been invested in the stock market?”

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