M2 growth retreated to 8.2% YoY in August from 8.5% in July, lower than the market consensus of 8.6% YoY. On a sequential, seasonally adjusted basis, M2 growth remained flat at 0.9% MoM in August. It is worth noting that fiscal deposits rose by Rmb85bn in August, compared with the Rmb390bn decline in August 2017, dampening the M2 growth by ~0.3ppt. Meanwhile, the YoY growth of fiscal deposits jumped to 16.7% YoY in August from 6.1% YoY in July. August M1 growth slumped to 3.9% YoY from 5.1% YoY in July, while sequential M1 growth dipped to -0.2% MoM in August from 0.3% MoM in July.

New RMB loan issuance came in at Rmb1.28trn in August, lower than the market expectation of Rmb1.37trn but higher than Rmb1.09trn in August 2017. However, the net increase vs. new issuance in August last year was largely driven by short-term loan issuance, potentially propelled by lower short-term rates, while medium/long-term loan demand is yet to pick up. New M/L-term household loans increased by Rmb442bn in August 2018, underperforming the Rmb447bn increase in August 2017; new M/L-term corporate loan issuance came in at Rmb343bn in August, lower than Rmb364bn in August 2017. Meanwhile, net increase of short-term loans and bill-financing rose to Rmb495bn in August, notably higher than Rmb318bn in August 2017.

New total social financing (TSF) came in at Rmb1.52trn in August, higher than the market expectation of Rmb1.3trn but slightly lower than Rmb1.56trn in August 2017, based on the new definition of TSF stock released by the PBoC in July with the addition of ABS and written-off loans. The “upside surprise” in new TSF was mainly driven by higher corporate bond issuance in August. Within new TSF in August, 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 Rmb267bn MoM in August, compared with Rmb130bn MoM net increase in August 2017. However, new corporate bond issuance picked up notably to Rmb338bn in August, notably higher than the Rmb114bn net issuance in August 2017.

Overall financial conditions continue to show early signs of stabilization in August, partially driven by the notable increase in local government bond net issuance. More specifically,

By the new definition of TSF stock, YoY Adjusted TSF growth stayed flat at 11.4% YoY in August (Adjusted TSF = TSF + local & government bonds). YoY adjusted TSF growth stabilized as local government bond net issuance climbed to Rmb765bn in August, compared with Rmb419bn in August 2017. On a sequential, seasonally adjusted basis, adjusted TSF growth slowed to 12.6% MoM annualized in August from 13.5% in July, but remained in the mildly “expansionary” territory since it was above 12% annualized.

Headline M2 Proxy growth may have slowed in August. Assuming 0% sequential change of PBoC FX positions, we estimate that the M2 Proxy growth may have edged down to 10.1% YoY in August from 10.3% YoY in July.

Meanwhile, money market rates fell in August, pointing to looser liquidity conditions. The weighted average interbank offered rate and pledged repo rate both declined by 18bp to 2.29% and 2.25% in August, respectively.

August money and credit data showed some encouraging signs, but also a few looming concerns -- on one hand, adjusted TSF sequential growth stayed at above 12% MoM annualized level for the second month, indicating stabilizing financial conditions. However, on the other hand, it appears that the transmission of looser liquidity to pick-up in real demand may still take time, while contractionary fiscal policy weighs heavily on demand growth. More specifically, the collapse in M1 growth, both in headline and sequential terms, points to continued deterioration of corporate and/or local government cash flow, which hinders an immediate pick-up in investment demand. Meanwhile, fiscal deposits rose further against the seasonal pattern in August, and continued to depress monetary expansion. The trend in fiscal deposit growth stands in drastic contrast with the government's stance of pushing for "accommodative fiscal policy". The ongoing policy mix is somewhat "conflicting" and continues to weigh on private investment and consumption sentiment – the “blockages” in policy transmission include restrictive fiscal policy, heightened regulatory scrutiny over financial institutions, as well as the ongoing "straight jacket" of more-aggressive-than-ever environmental protection inspections & forced capacity shut-downs, & etc. In addition, the recent concerns over potential hikes in effective social security contribution triggered wide-spread concerns over corporate profitability, especially when the external environment has grown increasingly uncertain. Therefore, as we have stressed repeatedly, more coordinated, decisive, and thoughtful policy adjustments are called for in order to “unblock” the transmission of the “growth-stabilization” policies. Without proper adjustments, the current policy combination may continue to “crowd out” the income and investment of private sectors and the downstream industries, given the still-uncertain demand outlook.