Phat dragon

17 November 2011

a weekly chronicle of the Chinese economy

The October data round concluded with a very interesting set of

monetary and credit aggregates. Phat Dragon has been of the view that some marginal easing of the degree of restraint facing the conventional banking system was likely in the early part of the December quarter. Accordingly, bank lending improved notably in October, both over September and relative to expectations. Going back to 2001, new lending in October has never exceeded the flow of new lending in the previous month, such is the scale of the regular seasonality. You dont have to have rooms in Baker Street to realise something was clearly afoot.

Bank loans and bill finance: monthly flows

500 400 300 200 100 0 -100 -200 Feb-11
Bill finance Medium & long term lending M&LT lending same month in 2010 Bill finance same month in 2010

RMBbn
Sources: CEIC, Westpac

RMBbn

500 400 300 200 100 0 -100 -200

Removing the top soil, Phat Dragon was not surprised to unearth

telling evidence regarding the motive for the revealed leniency towards the banks. Bill financing fell in the month of October, a sign that policy efforts to slow off-balance sheet lending has generated an abrupt deceleration in this increasingly important avenue of credit supply. Bill finance also has identifiable seasonality in the month of October: in the opposite direction to overall lending. So one might argue that a decline in the flow of new bill finance in October was almost as surprising in isolation as the increase in conventional loans: unless of course you read this chronicle on November 2. Two weeks ago Phat Dragon wrote that The shortage of credit that has become evident late in Q3 has been associated with a genteel slowing in the rate of growth in traditional lending and an absolute decline in bill financing and loans from trusts. The decline in bills is directly related to the decision to levy required reserves against margin deposits ... and ... shadow banking softened the blow of tightening credit policy in late 2010 and early 2011 [and thus] the slowdown in bank lending at this time exaggerated the tightening in financial conditions. At the present moment, with shadow finance under pressure, the slowdown in bank lending underestimates the tightening in financial conditions ... That is a strong argument for a near term reduction in required reserve ratios.

May-11

Aug-11

Nov-11

China: the money multiplier & sterilisation

70 60 50 40 30 20 10 0 Dec-03 Jun-05
Sterilisation issues % M0 (lhs) Ratio of M2 growth to M0 growth (rhs)

%
Sources: CEIC, Westpac

ratio

3.0 2.5 2.0 1.5 1.0 0.5

Dec-06

Jun-08

Dec-09

Jun-11

Phat Dragon feels that the authorities must have intimated to the

banks that they were amenable to a modest rally in conventional lending to alleviate some of the stresses visited upon borrowers by the shadow banking retrenchment. With only a very modest bill maturity schedule through to year end (27 billion yuan, versus the year to date monthly average of 300) and 97 billion yuan in maturing repos in the first half of December, passive OMO will hinder rather than help the banks. A reserve ratio cut of 50bps for all banks would free up around 400 billion yuan. That looks like the appropriate policy response. Stay tuned on this front.

system to breach 8% CAR, NPLs would have to rise to 11%. Moving on, a 15% NPL rate for developer and land loans and a 7% NPL rate for mortgages would reduce system CAR by 1ppt. A dynamic study mapping a 30% house price decline that takes account of the vertical linkages of real estate lowers system CAR by ppt. A 15% NPL rate for loans to local government financing platforms would push only two small joint stock banks below 8% CAR. A severe macroeconomic shock - GDP at 4% - pushes the systems CAR to around 8%. A rough sensitivity of 1ppt of CAR per 1ppt slowdown in GDP growth was cited. Phat Dragons own rules of thumb are in the same region as these estimates.

In the financial/fiscal reform arena, there have been three

It has come to Phat Dragons attention (via the gourmands in his

developments of note. The first was an experimental muni issue by Shanghai City; the second was the issue of a joint 3-year SME note backed by the governments of Guangdong and Shandong; the third was the release of the IMFs China Financial Stability Review and bank stress tests. Phat Dragon will deal with the latter document today, while forthcoming chronicles will return to the fertile field of fiscal reform. The bank stress tests indicate that a 400% rise in the NPL ratio of the top 17 banks (83% of commercial bank assets) to around 6% would not push any individual banks capital adequacy below the minimum 8% threshold. For half of the
Economic Research

London outpost) that certain prestige wines have been suffering substantial price declines as Chinese buyers become increasingly circumspect. The Lafite Rothschild 2000, a Bourdeau blend from the famous Medoc chateaux, a popular drop in the Mainlands increasingly well stocked cellars, saw its price per case rise from around 10k in early 2009 to around 25k earlier this year. Sinitic demand remained strong throughout. Of late, not so much. A case can now be had for around 17k, a 32% fall from the peak.

Stats of the week: China had more trucks than passenger cars
economics@westpac.com.au www.westpac.com.au

up to 1997 and more tractors than passenger cars up to 1999.

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