As growth in China M2 money supply hits a record low. China, Merchant Securities says that the market should not overestimate the adverse impact of Beijing’s deleveraging campaign upon the real economy,
Speaking to Caixin, CMS chief macroeconomics analyst Xie Yaxuan said that while the rising cost of and easing growth in total social finance will have an adverse impact on the Chinese economy, this impact should not be overstated.
China’s M2 money supply growth dropped to a record low in May, which will serve as a strong headwind for economic growth due to its negative impact upon fixed asset investment.
Xie points out that China’s economy is currently transitioning from an investment driven to a consumption driven economy, and the primary driver of consumption isn’t interest rates or the supply of funds but income levels.
With improving income consumption is expected to hold in China, thus offsetting any easing growth on account of tightened finance, and CMS sees second half economic growth remaining at around 6.6%.
Xie further notes that a decline in off-balance sheet financing has been offset by ongoing expansion in on-balance sheet loans, attesting to continued strong demand for funds in the real economy which is now being better served by Chinese banks.
The incorporation of various forms of off balance sheet financing back onto the balance sheets of financial institutions will help ease funds scarcity by reducing borrowing costs, with CMS expecting total social financing costs to only edge higher by roughly 50 basis points.
Shadow banking and off balance sheet financing has been hard hit by the regulatory crackdown that the China Banking Regulatory Commission unleashed earlier this year.
While entrusted lending and undiscounted banker’s acceptances saw year-on-year declines of 184.3 billion yuan and 124.5 billion yuan respectively in May, total social financing increased by 385.5 billion yuan compared to the same period last year, while lending towards the real economy increased by 1.18 trillion yuan, for a year-on-year gain of 240.6 billion yuan.