China Economic Watch:Record-high TSF possible cause for PBoC’s tightening bias

New TSF at record-high levels, despite weaker loan growth

    New RMB bank loans had a smaller-than-expected increase, to RMB2,030bn fromRMB1,040bn, in December (vs. the market consensus of RMB2,440bn), while new totalsocial financing (TSF) jumped to RMB3,740bn from RMB1,630bn in December (vs. themarket expectation of RMB3,000bn).

    Meanwhile, M2 growth in January was unchanged, at 11.3% yoy, vs. December, in linewith market expectations. Against a high base a year ago, outstanding bank loan growthdeclined to 12.6% yoy in January vs. 13.5% yoy in December, while TSF growth remainedflat, at 12.8% yoy.

    Notable increase in corporate and mortgage loans

    It is understandable that loans and TSF are highly seasonal, as banks typically preferfrontloading credit extensions to compete for high-quality projects and receive interestpayouts early. However, the record-high levels of medium-to-long-term corporate loansand household loans suggest that credit demand is particularly strong, notwithstandingthe PBoC’s tightening bias in 2H2016.

    In particular, trust loans, non-discounted bills, etc., in TSF have also jumped, despite thecentral bank’s intension to rein in off-balance-sheet lending through the new Macro

    Prudential Assessment (MPA) framework..

    Credit growth to soften amid tightening policy biasWe believe January money and credit data help explain the increasingly notabletightening bias in monetary policy. The PBoC has guided short-term market rateshigher, with the average 7d SHIBOR at 2.52% pa in January (up from 2.45% in 4Q16).Moreover, it raised interest rates on 7d, 14d and 28d reverse repos and 7d and 1mStanding Lending Facility (SLF) by 10bp on Feb. 3. In addition to allowing funding coststo edge up higher, there is also more evidence of the potential use of moral suasion.

    We continue to believe that the PBoC will likely tighten further through multiplechannels, such as liquidity control in the inter-bank market, credit quotas on commercialbanks (especially on property-related lending) and tightening the MPA restrictions. Evenwithout an adjustment of benchmark interest rates, we would expect funding costs torise further in the near future.

    As a result of such tightening that started in late summer 2016, we expect domesticdemand to weaken in 2Q-3Q2017, implying a potential slowdown in credit demand bythen, if not earlier.