M2 growth declined to 8.0% YoY in June from 8.3% in May, lower than the market consensus of 8.4% YoY . On a sequential, seasonally adjusted basis, M2 growth picked up to 0.7% MoM in June from 0.4% MoM in May. Fiscal deposits decreased by Rmb689bn in June, slightly (Rmb72bn) more than the Rmb617bn decline in June 2017, marginally lifting the M2 growth. Meanwhile, the YoY growth of fiscal deposits edged up to 13.6% YoY in June from 13.4% YoY in May, and remains notably faster than money supply and nominal GDP growth. June M1 growth picked up modestly to 6.6% YoY from 6.0% YoY in May, while sequential M1 growth rebounded to 0.9% MoM in June from -0.1% MoM in May, potentially helped by fiscal deposit dispersion.

New RMB loan issuance came in at Rmb1.84trn in June, higher than the market expectation of Rmb1.535trn and Rmb1.54trn in June 2017. Loan growth edged up to 12.7% YoY in June from 12.6% YoY in May. Among new loans, new medium-/long-term loans came in lower YoY for both household and the corporate sector, while the share of short term loans continued to rise, pointing to continued weakness of real economy funding demand amidst policy tightening. New M/L term household loans increased by Rmb463bn in June 2018, lower than Rmb483bn in June 2017; new M/L-term corporate loan issuance came in at a meager Rmb400bn in June, a sharp decline compared with Rmb578bn in June 2017. Meanwhile, net increase of short-term loans and bill-financing rose to Rmb791bn in June, notably higher than Rmb370bn in June 2017. Furthermore, outstanding loans to non-bank financial institutions increased by Rmb165bn in June, compared with Rmb14bn in May. The declining share of M/L loan indicates that both the supply and demand and loans may be severely impaired by regulatory tightening, while loosening liquidity alone may not be enough to boost the broad credit expansion.

New total social financing (TSF) came in at Rmb1.18trn in June, notably lower than the market expectation of Rmb1.4trn and Rmb1.77trn in June 2017, indicating that expansion of “new loans” is not enough to offset the contraction of other funding channels. Within TSF, new issuance of non-standardized assets (NSA), including trust loans, entrusted loans and banker’s acceptance bills, continued to contract sharply YoY– the three NSA items combined declined by Rmb692bn MoM in June, compared with Rmb222bn MoM net increase in June 2017. Furthermore, new corporate bond issuance increased modestly YoY – it edged up to Rmb130bn in June, compared with the Rmb17bn decline in June 2017.

Financial conditions tightened further despite larger new loan issuance on paper, mainly driven by continued sharp contraction of NSA financing. More specifically,

YoY Adjusted TSF growth  slowed further 11.2% YoY in June from 11.6% YoY in May (Adjusted TSF = TSF + local & government bonds). On a sequential, seasonally adjusted basis, adjusted TSF growth dipped to a meager to 6.2% MoM annualized in June from 9.1% in May.

M2 Proxy  growth may have also declined in June. Assuming 0% sequential change of PBoC FX positions, we estimate that the M2 Proxy growth June may have slowed to 9.8% YoY in June from 10.2% YoY in May, and sequential annualized M2 proxy growth may also be below 10%.

Meanwhile, money market rates stayed largely flat in June. The weighted average interbank offered rate and pledged repo rate edged up by 1bp and 7bp to 2.73% and 2.89% in June, respectively.

Sequential annualized adjusted TSF growth has stayed at single-digit level for 5-6 months already, pointing to increasing pressure of decelerating growth and falling inflation. It is time for more timely and decisive policy adjustment to bridge the large “funding gap”. As we have repeatedly discussed in our recent research, overlapping policy tightening targeted at “deleveraging” has led to a large “funding gap” for the real economy. Both the demand and supply for financing are severely dampened, via fiscal, monetary, and regulatory tightening . As we have analyzed in our previous research, financial market movements in reaction to the tightened financial conditions is already exacerbating the funding shortage for the real economy, creating a “vicious cycle”. Therefore, it is high time that we see more decisive and coordinated policy adjustments on monetary, fiscal, and regulatory fronts, in order to “neutralize” the financial conditions  and help the economy and the financial market to break out of the negative feedback loop. Note that the PB-implied NPL ratio for domestically listed large China banks has already reached historical high, which illustrates market concerns for corporate and local government cash flow amidst overly-rapid tightening of funding channels. Understandably, even companies with healthy balance sheet and solid cash flow will run into “credit crunch” when the funding channel is being shut down abruptly. On the other hand, history has repeated showed that overly-tight financial conditions eventually push leverage ratio higher, since deflationary pressure exacerbates the debt burden, and withered cash flow drives corporate and local governments to borrow.