The latest official data points to a sharp contraction in China’s total social financing in the month of May, as off-balance sheet forms of shadow banking post sizeable drops following the launch of new asset management rules.
Data released by the People’s Bank of China on 12 June indicates that as of the end of May the broad M2 money supply was 174.31 trillion yuan, for a year-on-year rise of 8.3%, as compared to consensus forecasts of 8.5%.
New RMB lending was 1.15 trillion yuan that month, for an expansion of 40.5 billion yuan compared to the same period last year, yet a decline of 30 billion yuan compared to the previous month.
Total social financing, a broad measure of credit extended to the private sector of the economy, came in markedly under expectations at 780 billion yuan, or almost half the reading for April, as well as 302.3 billion yuan less than the reading for the same period last year.
Liu Dongliang (刘东亮), senior analyst with the asset management department of China Merchant bank, said that the official data points to an immense contraction in off-balance sheet financing with the exception of equity financing, with a large-scale drop in entrusted loans and trust loans.
According to Liu this drop in shadow banking activity is the result of China’s new asset management regulations which place strict controls on off-balance sheet financing.
Lin Shu (林澍), macro-analyst with China Merchant Securities, said that private enterprise will be hardest hit by the contraction in off-balance sheet financing.
“In May direct financing saw almost zero growth, while this month bond financing will see negative growth due to the impacts of defaults as well as failure by the bond market to maintain its prior recovery,” said Lin.
According to Liu Dongliang the total social financing reading for May has set off a macro-economic “alarm” for regulators.
If low readings persist it could be difficult for the Chinese economy to maintain the robust performance its posted in recent months, while insufficient financing for enterprises could trigger further defaults, further tightening financing conditions and creating a negative feedback loop.
Many analysts say this prospect has increased the likelihood of further required reserve ratio cuts from the Chinese central bank in future, in order to avert corporate re-financing risk and encourage banks to extend credit.
“In the short-term, expectations of an economic downturn will re-emerge until appropriate adjustments are made to regulation and policy…the only sure thing is that at this time the central bank will not rashly tighten liquidity.”