M2 growth edged up to 8.3% YoY in September from 8.2% in August, in line with the market consensus. On a sequential, seasonally adjusted basis, M2 growth stayed flat at 0.9% MoM in September. Fiscal deposits declined by Rmb347bn in September, lower than the Rmb397bn decline in September 2017, which dampened the M2 growth. Meanwhile, fiscal deposit growth jumped to 19.4% YoY in September from 16.7% YoY in August, reflecting inefficient deployment of fiscal funds amidst accelerated local government bond issuance. September M1 growth edged up to 4.0% YoY from 3.9%, but remained at a low level, while sequential M1 growth picked up to 1.1% MoM in September from -0.1% MoM in August.

New RMB loan issuance came in at Rmb1.38trn in September, marginally higher than the market expectation of Rmb1.36trn and Rmb1.27trn in September 2017. It is worth noting that the share of medium/long-term loans continued to decline due to deteriorating investment demand. New M/L-term household loans increased by Rmb431bn in September 2018, lower than the Rmb479bn net issuance in September 2017; new M/L-term corporate loan issuance came in at Rmb380bn in September, lower than Rmb503bn in September 2017. Meanwhile, net increase of short-term loans and bill-financing rose to Rmb598bn in by September, notably higher than Rmb206bn in September 2017.

Reported new TSF came in Rmb 2.21 trillion, but Rmb739bn of the increase in September was purely driven by the inclusion of special local government (construction) bonds into the TSF statistics for the first time. Under the previous definition, new total social financing (TSF) came in at Rmb1.47trn in September, lower than the market expectation of Rmb1.55trn and Rmb1.99trn in September 2017. According to the new and expanded definition of TSF, new “TSF” in September 2017 still came in higher than last month at Rmb2.25trn. Within new TSF in September, 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 Rmb289bn MoM in September, which came in visibly lower than the Rmb393bn MoM net increase in September 2017. Furthermore, new corporate bond issuance declined notably to Rmb14bn in September, lower than the Rmb165bn net issuance in September 2017.

Overall financial conditions tightened marginally in September, driven by continued contraction of NSA financing and lower corporate bond net issuance. More specifically,

Headline Adjusted TSF growth edged down to 11.2% YoY in September from 11.4% YoY in August (Adjusted TSF = TSF + local & government bonds). Our calculation of adjusted TSF remains largely unaffected by the adjustments to the statistical coverage of TSF, as it had taken into account all government bonds all along. On a sequential, seasonally adjusted basis, adjusted TSF growth slowed further to 10.5% MoM annualized in September from 12.5% in August, falling below the “neutral” level of 12% again after two months’ expansion.

Headline M2 Proxy growth may have also slowed in September. Assuming 0% sequential change of PBoC FX positions, we estimate that the M2 Proxy growth may have slowed to 9.8% YoY in September from 10.1% YoY in August.

Meanwhile, money market rates edged up in September, from low levels. The weighted average interbank offered rate and pledged repo rate picked up by 30bp and 35bp to 2.59% and 2.60% in September, respectively.

All considered (and re-adjusted), September money and TSF data indicate that the policy adjustments so far still appear insufficient in curbing the downward pressure in aggregate demand growth, especially considering rising external demand uncertainties. Granted, monetary policy has become incrementally more “accommodative” since June, evident in the more frequent RRR cuts and the rapid decline of the short term rates. However, a “de facto” contractionary fiscal policy setting and tightened regulatory environment continued to impede the transmission of looser liquidity to a pick-up in the broadly-defined credit cycle. September money and credit data once again demonstrated the dampening effect of “de facto” contractionary fiscal policy setting and regulatory tightening on the credit cycle -- fiscal deposit growth surged further to 19.4% YoY, depressing monetary expansion; while the shrinking credit stock via the NSA channels shaved off YoY adjusted TSF growth by another 0.3ppt in September. Although faster local government (special) bond issuance made up for part of the funding gap, overall credit growth continued to moderate. Share of long-term loans continued to decline against the backdrop of slowing corporate profit growth, as well as rising perceived investment risk premium in both mfg. and property investment. It is high time to reduce or resolve the “blockages” in monetary policy transmission, in order to stabilize domestic demand growth and the flagging investment confidence in a rising external risk environment.