Chinese Credit Growth Slows Significantly

Yves here. This is a short post, but don’t underestimate the significance. The big picture is that Chinese government has been tightening credit to try to lower inflation, with some success, and various commentators have been calling a soft landing outcome. But residential real estate sales took a tumble in November, and electricity use fell in January (although that may be in part due to the Chinese New Year). This is another sign that just as American economists were unduly confident in their ability to fine tune the economy in the 1960s, so too may analysts be overly optimistic about the ability of Chinese leadership to control its economy.

Cross posted from MacroBusiness

A week ago Phat Dragon was oozing calm in relation to what the January credit figures would say about the economy. Either an even 1 trillion yuan would be disbursed (the consensus), which would been fine, or a larger number would print, which would mean that the turnaround in monetary policy, as expressed through bank lending, was unambiguously here. Having now seen the new lending figure – a genuine tiddler at just 738 billion – (if that were a hooked fish, you’d throw it back in disgust) that state of calm has rapidly evaporated. The last time that a January month produced a smaller nominal new lending flow was in 2007. The economy has expanded by 77% since that time. Unless new lending jumps sharply in February – and by sharply Phat Dragon means a lift beyond even the extravagances of 2009 – then an annual loan supply north of 8 trillion yuan (and thus a total social financing provision that keeps pace with nominal GDP) is under serious threat.

A huge problem with relying on that to happen is that February lending has exceeded January lending exactly … let me just count this on my talons , … exactly, … bear with me … – exactly never. If an appropriate credit supply is not forthcoming, downside risks to already decelerating aggregate demand will emerge swiftly. In sum, Phat Dragon will reconsider his baseline 2012 forecasts if February loans do not break all sorts of records in addition to the Sinitic laws of seasonal motion.


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  1. Fiver

    Hi Yves,

    I think the Chinese have already reversed course. The political leadership in my view has pretty much lost control of the economy to their version of the Kleps. They could not maintain a policy of pulling back from runaway “growth” that isn’t growth through even a very short, minor slowdown, and are already reversing course, not just stopping tightening, but identifying new ways to stimulate apart from local government/bank lending (direct stock market purchases being but 1 example). But even there, the pullback phase is over:

    And just what was Henry Kissinger doing over there with the next Chinese Leader over a month before Obama sees him? I don’t imagine it was to get lost in reverie for old times.

  2. Mookie

    How does the recent publicity of Citi’s entry into the personal credit card market in China fit into this? Credit cards have been all-but non-existent in terms of the average Chinese city dweller, so this announcement seems significant to me.

    Given that:
    A) credit cards were relatively rare in the US until the early-mid 1980’s, a period which saw the beginning of the inflation of a massive consumer debt bubble;
    B) the FIRE economy’s lifeblood is credit/debt;
    C) there is no possibility of further “growth” in the average US consumer’s debt,

    it seems to me that the global finance industry is looking to prolong the world-destroying FIRE party by inflating a consumer debt bubble in a place where consumer debt is relatively low: China.

  3. Leverage

    So the ‘little’ MMT experiment of Chinese regime is failing miserably.

    Not only an huge amount of capital has been malinvested in unnecessary housing and infrastructure, but they haven’t managed to invest in any significant thing that can cut operating costs of society and control headline inflation.

    Now there are a lot of corporate and local balance sheets underwater loaded with unproductive investments that won’t pay themshelves ever, and the governemnt it’s tied because of inflation risks (when wages are not increasing as fast and purchasing power is diminishing).

    The only temporary “solution” (can kicking) is to follow the disaster model set by western nations of overleveraging households (importing inflation from the future to temporally boost economic activity and consumption).

    All praise our financial overlords and central bankers/governments geniuses.

    God lord end this pain, lol.

    1. Philip Pilkington

      Common misconception. The Chinese do not fundamentally have a malinvestment problem. They have an underconsumption problem.

      They have people living in slums and eating plain rice. Meanwhile, an hour’s train journey from them are empty cities and shopping malls loaded with consumer goods.

      Malinvestment? Yeah, right. Maldistribution, more like. China are going to have to allow the yuan to float eventually. And in doing so they’ll also have to redirect employment into the public sector as export employment falls.

      1. Leverage

        That’s why inflation pressure is problematic for the authorities, sure. Increase consumption and it will only get worse.

        Yeah, they have a consumption problem because they don’t have enough spare capacity (lack of significant safety nets and stratosferic real estate prices, wages can’t keep up with all that). Keep financing real estate bubbles and inefficient infrastructure, that will end very, very well.

        P.S: But it’s all right, water scarcity in some areas of China and heavy increasing pollution will create more jobs in the future.

        Create a problem -> “Solve” it -> Repeat = Kick the can to the eternity.

        P.S: China already has an huge amount of public employment is a big chunk of the workforce, given that a lot of stuff is owned by the State.

        1. Philip Pilkington

          Eh, no. If you increase the value of the yuan more goods that would otherwise be sent abroad will become available for Chinese people. That will lead to decreased inflation, as the same amount of money will be chasing far more goods and service.

          To say that China has an undersupply problem and that’s why its inflation rate is moderate (not high, moderate) is a bit weird given that they export so much stuff and have such low wages.

          1. Leverage

            “Eh, no. If you increase the value of the yuan more goods that would otherwise be sent abroad will become available for Chinese people. That will lead to decreased inflation, as the same amount of money will be chasing far more goods and service.”

            First, available does not mean that will be consumed, there are income levels which give purchasing power. What makes you think they could buy more just because they are exporting less. That’s non-sense. They are buying more exactly because they are exporting more.

            Yes, if inflation decreases because demand decreases due to reduced money flows from trade surplus that means also less activity locally, which is also a problem.

            “To say that China has an undersupply problem and that’s why its inflation rate is moderate (not high, moderate) is a bit weird given that they export so much stuff and have such low wages.”

            China imports as well as exports (btw, look at last data…), they need imports to produce exports. It’s not a closed loop between China-USA/Europe.

            Off course they have local demand too from a lot of stuff, and scarcity locally can create inflation (and for global goods it adds up). There is a global as well as a local component to price formation, unless you ignore the plethora of costs that go into that price.

            Things are not as simple as you want them to be, but that off course happens with every theory which looks good on paper.

          2. Philip Pilkington

            “First, available does not mean that will be consumed, there are income levels which give purchasing power.”

            You haven’t thought this through, dude. A higher valued yuan gives a de facto increase in purchasing power.

            It works on paper. And it usually works in the real world too.

          3. Leverage

            You imply that its automatic and equal for all the people, that there is no previous history on each economic actor (balance sheets, net equity positions, etc.). It isn’t. Stronger currency can mean also pressure on labour in the short term, for a starter, which it always is.

            You also ignore how this can affect export business and their finances (and their employees), or how can the transition from an easing phase to a contracting phase affect the whole economy and interest rates, for example.

            Again, not as easy as you think and would like it to be.

    2. Heretic

      MMT is simply the recognition that governments are sovereign over it’s currency, and are never slaves to the bond market, however MMT does not say what to spend the money on. It is the Operation of the market, (all those intelligent self interested John Galt types), that are supposed to guide the investments. And like their more liberated western counterparts in the USA and Europe, they have chosen to build really expensive real estate,
      And we all know how this story can play out…

  4. Philip Pilkington

    Why can’t we assume that the Chinese will replace this with government infrastructure projects if unemployment rises? I literally never see an argument against this…

    They could also allow the yuan to appreciate in order to boost spending power at the very same time which would redirect goods into the domestic market and help cool inflation.

    The Chinese have so much policy space, it’s not even funny. Yes, it depends on the competence of their leaders, but then that is always the case…

    1. Fiver

      So they can do everything but slow down, which is the one thing they absolutely must do. Some “space”.

  5. ambrit

    How much of Chinas’ inflationary ‘problem’ is related to their export sector? As Brother Philip avers above, they have the policy options available to manage the problem. My question is, they being rational actors, and quite rightly focused on their own house, how much of the financing needed for some public works programs to smooth out the coming rough waters will be done through the sale of Chineese holdings in Treasuries? Could that have been the subtext of Papa Henrys’ visit to the Middle Kingdom last week? I would appreciate feedback from old ‘China Hands’ on this.

    1. Philip Pilkington

      That’s a good question. But it ultimately comes down to this:

      If China allows the yuan to appreciate, what does this mean for America’s ability to import Chinese goods? Well, it means that they won’t be able to import as much. (All of this will be seen through the exchange-rate, not through the T-bill market — I won’t get into why right now…).

      My feeling is that this transition will be quite gradual. And I think America can refocus their industry if such a situation were to occur — at least, the historical data seems to indicate this. So, in short: no catastrophe. Just a gradual rebalancing.

      Unless the CCCP screw it up. Me and Mosler always joke that it all depends on if the newly Western-trained economists get a grasp of the levers of power (which are currently held by practical people, like engineers). If that happens, China may yet screw the whole thing up…

      1. ambrit

        Mr. Pilkington;
        Re. “America can refocus their industry..” Are the Chineese then ready to help in this endeavour? American wages have been falling, and at last Chineese wages rise? To meet in the middle, or is it going to be a race to the bottom? Basically, whos’ concept of “labour” is going to win out here? Perhaps America does have a huge export product after all; organized labour. Help the Chineese workers organize and who knows what’ll happen?
        As for T-bills versus exchange rates; I’ll be digging out my economics texts this weekend and rereading those chapters I obviously didn’t fully grasp. Keep up the good work.

    2. Leverage

      Control inflation = Problem with growth and households equity positions. Pressure on corporate balance sheets (hey, who cares, government can always buy corporations so they don’t default) because underperfoming investments.

      Unleash inflation = Problem with disposable income and purchasing power. Eventually a problem with employments (not competitive enough if wages rise too much).

      You can’t kick the can forever, there is a point in time when structural problems appear that show that you have been consuming more capital than you can produce, yes, there are real constraints to the economy.

      Now, how governments can help the population take it easier is an other question (sure China could do a lot on that distribution question being a ‘communist’ regime and all that), but the illusion that there is no such thing as opportunity costs to past decision is a joke.

  6. Schofield

    Hardly a “Little MMT Experiment”. They’ve been doing a “Big MMT Experiment” for years. This is the prime cause of their thirty odd year’s 10% average annual GDP growth. It’s the c cause of real wages quadrupling because of the huge growth in private enterprises competing and driving down (deflating) prices. Deng Xiaoping realised that it would take time for an entrepreneurially backward people to gain the skills to compete with the West so efficiency would take time to learn and a big incubation period necessary through subsidy of the virtual state bank monopoly on non-performing loans. Now that Deng Xiaoping is gone it remains to be seen whether his successors will be stupid enough to allow the knee-capping processes of the Western financial system to invade their economy through inability to understand how money actually works. You might think the global recession caused by the West’s ineptitude would be warning enough but not understanding why it happened is easily possible as we can see by Westerner’s comments on financial articles in their media.

    1. Leverage

      This wasn’t an attack to MMT, because you can’t attack MMT, but you attack policies made abusing MMT (for example stupid imperial wars in Iraq or Afghanistan).

      All nice and dandy, but since a few years ago they have abused it to replicate exactly what the west has done: investment in bubbles at record speed.

      P.S: Most of that growth was led by external demand and jobs import, All that was possible to an extend thanks to an other huge bubble in some developed nations again.

      just like the outstanding pro german export industry was able to survive again because that overleverage.

      What a lot of people does seem not to get is that all that creates disequilibriums which have to paid for at some point, so you either writedown a lot of stuff and make creditors pay, you get diminishing purchasing power and increasing poverty or you do whatever. It’s a social and political decision how you solve it, but you HAVE TO solve it at some point.

      But you CAN’T kick the can forever, that’s no solution. But that’s what the status quo would you like to believe, that the “american dream” can go on forever while you solve nothing of the underlying issues that got you here. Only have to print some more and it’s all fine. until it isn’t and in some years we are yet worse than before.

  7. Schofield

    Sure we all know about the private debt bubbles in developed nations but MMT tells you to be wary of letting them get out of hand. So what are you saying Leverage about MMT that’s worth saying?

    1. Leverage

      In the case of China direct state intervention using sovereign money to support all kind of spending and buying paper from local governments, banks (which are state owned anyway) and corporations is what has propelled the bubble so fast.

      Applying these policies in the wrong hands is as disastrous as anything else.

  8. Susan the other

    They were here just last week, the next in line to be president, scouting out things they want to buy. In the Midwest. That means agricultural and automotive, right?

    1. ambrit

      Dear Sto;
      Not only agriculture, the automotive companies have been in China for quite some time now, but also, I suggest Green Energy companies. There is a huge barely tapped wind power potential in Americas’ heartland. The Chineese are avant garde in this sector. Expect more of what they have been doing in Africa to be reenacted here. Never forget, the Chineese consider the entirety of the rest of the world ex China itself to be Third World. Call it a neo-mercantilism if you will.

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