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Q&A on questions on January TSF and money supply data
January adjusted TSF growth picked up notably, with sequential growth jumping to ~15% MoM (ann.). In our view, this marks the first concrete signal of credit expansion since October 2017. Looking forward, adjusted TSF growth may continue to recover in 1H2019, helped by monetary easing and the front-loading of government bond issuance. Consequently, growth & inflation expectations may see some recovery from the low-point in 4Q18. January new TSF amounted to Rmb 4.64 trillion, surpassing the very high end of the market estimates. We have published our comment on the data shortly after the data release last Friday. However, since this set of financial data sparked wide-spread market discussion over the weekend, we share our thoughts on some frequently asked questions in this short note. We also take this opportunity to refresh our framework on tracking China’s credit cycles, as well as their potential impact on growth and inflation down the road.
Q1: M1 growth made new low (0.4% YoY) in January despite a pick-up in M2 growth, what is the implication of this divergence?
A: According to our estimate, adjusted M1 growth may have already picked up in January, after netting out the Lunar New Year (LNY) effect. We expect M1 growth to recover to 3% YoY or higher in February, after the negative LNY effect fades. It is worth refreshing that M1 in China only includes corporate and government demand deposits, while excluding the household deposits. Therefore, M1 tends to “dip” right before the Lunar New Year as the corporate and government sectors pays off their employees before the long holiday, which entails a “transfer” from corporate/government deposits to household savings. The effect of this “transfer” on M1 usually normalizes in few weeks’ time. The LNY day falls on February 4, which is considered fairly close to the month end. Figure 1 illustrates the LNY effect on M1 growth in January vs. February when it is close to the month end – in these cases, January M1 growth tends to slow visibly before rebounding in February. After adjusting for the LNY effect, we estimate that underlying January M1 growth come in between 2-2.5% YoY, with strong implied sequential growth of ~10% MoM annualized. This is not surprising as local government bond issuance expanded notably YoY (net issuance of Rmb 418bn in January 2019 vs. 0 in January 2018). We expect the policy support for local government bond issuance to continue in the near term. We reiterate our view that under the current macro conditions, continued expansion of local government bond issuance and/or a recovery of property transition growth may be most effectively in lifting M1 growth. As a side note, we estimate that LNY being close to January 31 may have lifted M2 growth by ~0.2ppt in January as well. We expect the LNY effect on both M1 and M2 (in opposite directions) to normalize in February.
Q2: There is a considerable share of loans issued as short-term loans and bill financing in January, reflecting still-anemic demand growth. Does this mean the pick-up in TSF growth will be short-lived?
A: Not necessarily. Empirical evidence shows that the share of short-term loans is not indicative of the sustainability of the credit cycle by itself. Since credit cycle leads activity growth, nominal income growth, and corporate profit cycles, it is natural for short-term loans and bill financing to rise first in a credit expansion cycle – as the demand growth of the real economy follows, not leads the credit expansion. In the early phase of the credit cycle, which is usually characterized by lower interest rate, it is natural for short-term loans and bill financing to rise first, while real demand may follow after growth and inflation expectations recover. The share of short-term loans and bill financing took up 43% of total new Rmb loans in January, which comes in lower than its share in early 2009 and early 2012 (both at ~60%) . Considering the fact that this is the first clear up-tick of TSF growth since 4Q2017, we would give it the benefit of doubt for now – in our view, more coordinated growth-stabilization policies will likely enhance the sustainability of the credit cycle, including fiscal expansion via expanding local government bond issuance and effective fiscal reserve deployment, continued efforts in promoting infrastructure investments (in terms of favorable policy environment for project approval, execution, and financing) , as well as relaxing some of the more restrictive policies on property demand (esp. in 1st and 2nd tier cities) and developer financing.
Q3: On a more comprehensive level, does January new TSF issuance mark a meaningful pick up in the credit cycle? What does this mean for growth and inflation down the road?
A: Possibly, at least in the short term. Our preferred measure of the credit cycle, adjusted TSF growth, picked up to 10.8% YoY in January from 10.2% YoY, while its sequential growth jumped to ~15% MoM annualized, highest since October 2017 (right before the issuance of the new asset management guideline, officially marking the start of “financial deleveraging”). Meanwhile, bank balance sheet growth may have picked up in January as well. As we have discussed in our past research, we view 12% MoM annualized sequential growth as the necessary pace to maintain a “inflation-neutral” growth. Therefore, if the sequential growth of adjusted TSF growth can be maintained at >12% MoM annualized in the next few months, we may start to see a recovery in sequential growth, inflation expectations, and nominal income growth.
Q4: Is the pick-up in TSF growth sustainable? How will it likely evolve?
A: It is likely that adjusted TSF growth may pick up in 1Q2019 vs. 4Q2018. The trajectory of the credit cycle for the rest of the year may be a result of the interplay between the pace of monetary & fiscal policy expansion vs. the outlook of the property market. As we have highlighted in our January macro data preview, January YoY M2 and TSF growth was partially helped by the shift of LNY day to February 4 in 2019 from February 16 last year, however, the effect of this factor on January TSF may be secondary to the impact of more effective policy “fine-tuning”. Since the LNY may dampen bond and credit issuance in February to a certain extent, new TSF growth may not beat expectation by as wide of a margin than in January. However, given the policy intention to “front-load” local government special construction bond issuance in 1Q2019 (by ~1 trillion net issuance in 1Q2019 vs. 0 in 1Q2018), TSF growth may be supported in 1Q. Looking forward, the main upside risks for monetary expansion and cyclical momentum lies in more forceful fiscal expansion (esp. via bond issuance and/or policy bank credit expansion) and more effective monetary/regulatory loosening, while the main source of downside risks for domestic credit cycle remains to be the deteriorating property cycle and its “knock-on effects” (e.g. slower M1 growth and household loan demand, among others).