China's New Credit Data Sparks Speculation of Quantitative Easing
Just a fortnight ago, the global community was captivated by the idea that Chinese stocks could potentially double in a matter of weeks. This notion was fueled by reassuring statements from Beijing and the belief that China had an abundance of naive investors. However, the optimism was short-lived, as we previously warned that the party was about to end.
Why China's Rally Won't Last
The main reason for this prediction was that China would not be able to replicate previous reflationary episodes. This is because Beijing would not be able to recreate the credit impulse explosion that rejuvenated the Chinese economy during previous downturns, such as those in 2012, 2015, and 2020.
In the 2015 stimulus cycle, China’s credit impulse peaked at 13.5 trillion yuan, equivalent to over 15 percent of GDP. Given that China’s nominal economy is now twice as large, an equivalent stimulus would require the credit impulse to peak at 27 trillion yuan.
However, at its most recent peak, China’s credit impulse did not even reach 5 trillion yuan. This implies that the newly announced stimulus cycle would need to be five times greater than the most recent peak to be comparable to the 2015 episode.
China's Latest Credit Data
China recently released its latest credit data for September, and the results were disappointing. Both the broadest credit aggregate, total social financing (TSF), and new RMB loans remained weak, which was in line with market expectations.
New RMB loans were lower than market expectations and significantly lower than a year ago. The outstanding RMB loan growth declined to 8.1% year on year in September. Furthermore, the composition of new loans suggested that credit demand remained weak in September.
TSF flows remained largely unchanged from August to September, as an increase in government bond issuance was offset by a decline in corporate bond issuance. In year-over-year terms, TSF stock growth edged down to 8.0% from 8.1% in August.
The Implications of the Credit Data
The September credit data indicated that credit demand from private sectors remained weak. Household loan growth remained low, and corporate loan growth moderated. Money supply data were mixed: M1 stock still experienced a deep contraction, but M2 growth picked up in September.
The deep M1 contraction still signals likely disinflationary pressures in the coming months. For Beijing to have any hope of a successful reset, M1 has to surpass M2.
China's First Step Towards QE
Following the publication of the disappointing credit data, China's Caixin reported that the country is considering issuing "6 trillion yuan from ultra-long special treasury bonds over three years as part of its efforts to bolster the slowing economy through fiscal stimulus."
With such large amounts, the central bank will have to backstop demand, hence the speculation of quantitative easing. If China does implement QE, it could trigger a global reflationary tsunami, causing oil, bitcoin, and gold prices to soar.
Bottom Line
The latest credit data from China is a clear step in the wrong direction for the country and Beijing's attempts to reflate the economy. Unless China implements quantitative easing soon, it could find itself in a much larger economic hole in 12 months. What are your thoughts on this matter? Feel free to share this article with your friends and sign up for the Daily Briefing, which is delivered every day at 6pm.
