Phat dragon

15 February 2012

a weekly chronicle of the Chinese economy

A week ago Phat Dragon was oozing calm in relation to what the

January credit figures would say about the economy. Either an even 1 trillion yuan would be disbursed (the consensus), which would been fine, or a larger number would print, which would mean that the turnaround in monetary policy, as expressed through bank lending, was unambiguously here. Having now seen the new lending figure - a genuine tiddler at just 738 billion - (if that were a hooked fish, youd throw it back in disgust) that state of calm has rapidly evaporated. The last time that a January month produced a smaller nominal new lending flow was in 2007. The economy has expanded by 77% since that time. Unless new lending jumps sharply in February - and by sharply Phat Dragon means a lift beyond even the extravagances of 2009 - then an annual loan supply north of 8 trillion yuan (and thus a total social financing provision that keeps pace with nominal GDP) is under serious threat. A huge problem with relying on that to happen is that February lending has exceeded January lending exactly ... let me just count this on my talons , ... exactly, ... bear with me ... - exactly never. If an appropriate credit supply is not forthcoming, downside risks to already decelerating aggregate demand will emerge swiftly. In sum, Phat Dragon will reconsider his baseline 2012 forecasts if February loans do not break all sorts of records in addition to the Sinitic laws of seasonal motion. meagre January lending flow is reinforced by weakness in the growth of narrow money. The money base was just 3.0% above the levels of a year ago in January, which beyond a tough of seasonality reflects a passive PBOC balance sheet in the face of a decline FX reserves in Q4. Phat Dragons preferred approach to policy early in the year is to a) finance bank lending growth above deposit growth through enabling RRR cuts; b) maintain existing controls on housing investors while normalising conditions for first home buyers and genuine upgraders; and c) lift infrastructure spending funded directly by the central government, with a focus on utilities and intra-city mass transit. There have been a few nods in this direction. It has been stated that an orderly increase in infrastructure projects should be promoted. The 5% premium over the benchmark lending rate payable by first home buyers last year has been removed. Yet the RRR has only been cut once. More needs to be done. package - it has been reported that banks have been encouraged to roll over maturing loans made to local governments and their conduits. Phat Dragon argued in August of last year that ... there is an information deficit in terms of the risk profile of the entire [local government debt] stock, who holds the riskier loans and even where ultimate risk comes to rest (which contingent liabilities of the county/city/provincial and then, finally, the national government, will be recognised as such if they fail to perform on a commercial basis. Phat Dragon is of the view that a major category migration within the current pool will be executed. The rollover decision betrays the fact that Beijing is not of a mind to think too hard about this mess for the moment, thus delaying any creative solution prior to the leadership transition. Leaving the burden on bank balance sheets is certainly not without risk, but it is cheap and
Economic Research

New bank credit flows

2000 1600 1200 800 400 0 -400 Jan 09 RMBbn
Household Medium and long term loans Other short term Bills Total

RMBbn

2000 1600 1200 800 400 0 -400

Jan 10

Jan 11

Jan 12

Chinese GDP & the money supply

16 14 12 10 8 15 %yr
Sources: Westpac Economics, CEIC

%yr

30

GDP (lhs) M2 (rhs)

The impression of an austere policy environment created by the

25

20

6 10 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13

Various splits of local government debt

100 80 60 40 20 0
By region By reason By vehicle By maturity By source By level
East

%
Other Other

%
2014 or later
Upper Bound LICs

100 80 60 40

On a different matter - cleaning up the legacy of the last stimulus

Centre

Other Infrastructure construction

Fiscal

West

Other

Bonds

County

2013 2012 LICs 2011 Loan

City

Province

20 0

administratively simple, two characteristics that generally appeal to the political mind.

Stats of the week: Almost 1 billion m2 of residential floor space

was completed in 2011.
economics@westpac.com.au www.westpac.com.au

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