China November credit growth belies slowdown, economists say

Credit conditions in China continued to tighten last month, leading economists to anticipate cuts to the central bank's reserve requirement ratio for lenders in the short-run in order to provide liquidity and - eventually - allow a weaker currency as well.

New bank lending picked-up from 663bn yuan in October to 1.12trn yuan (consensus: 800bn yuan) for November, according to the People's Bank of China.

Likewise, so-called Total Social Financing, a broader measure of financing preferred by the PBoC, increased by 1.6trn yuan (consensus: 1.225trn yuan) last month after a rise of 1.04trn in October.

However, economists at Pantheon Macroeconomics and Capital Economics said the improvement was only seasonal.

Indeed, upon seasonal adjustement TSF declined from 1.711trn yuan to 1.679bn yuan, according to Freya Beamish, Pantheon's Chief Asia economist.

"The flow of RMB bank loans held steady but trust loans and undiscounted bankers acceptances fell. These instruments had come back into vogue this year but the authorities likely have cottoned on to the re-surgence and are cracking down as part of a wider assault on China’s credit addiction," Beamish explained.

Beamish also expected officials in Beijing would soon crackdown on offshore debt issuance - to lower exposure to Fed hikes - alongside recent moves to regulate micro-lenders.

"The recent trends imply that monetary conditions are stabilising at the margin but we think conditions will tighten again in 2018; rising external yields will imply a combination of higher domestic rates and capital outflows, which the authorities will partially offset by selling FX.

"That in turn also will tighten liquidity conditions. The PBoC likely will shift its interest rate corridor higher, early next year, but will address chronic liquidity stresses in the smaller banks by cutting the RRR. We expect the PBoC eventually to capitulate and allow the RMB to depreciate more sharply."

Economists at Deutsche Bank were of a broadly similar view, telling clients on Monday to expect the PBoC to keep benchmark policy rates steady in 2018 - but with upside risks, especially in the back-half of the year.

Deutsche also saw the reserve requirement ratio being cut twice in the second half of 2018, with the yuan weakening in parallel, to 6.70 and 6.90 by year-end 2018 and 2019, respectively.

The German broker added: "We think GDP growth will likely slow in H1 [of 2018] to below 6.5%. This will lead the government to loosen property sector policy somewhat in Q2. Growth should rebound slightly in H2."