Fans of the British television series Doctor Who are aware that the Tardis is a lot bigger than it looks. So too is China’s banking system, according to the latest in a series of reports on Chinese credit growth released by HSBC.
Authored by Zhang Zhiming, HSBC’s Head of China Research, the new report looks at lending that falls outside areas traditionally measured (and guided) by policymakers.
Take the current data, in which credit conditions look tight if the reference points are bank loans or M2 money supply (which have both been cut by half since late 2009).
But if the analysis goes beyond loan quotas and M2 growth, the story changes significantly, Zhang says. In fact, when a range of alternative financing options is added to the tally (to create a ‘total social financing’ or TSF number, in economist-speak), talk of a cutback in credit looks like a myth.
According to Zhang, ‘total social financing’ as a concept was first introduced by officials from the People’s Bank of China about a year ago. At the time, regulators were reporting success in slowing down the surge in bank loans triggered by the country’s massive stimulus campaign. But they were worried that bank loans were only part of the picture. Credit was finding its way into the real economy from new sources.
In part that reflected growth in the corporate bond market, where new issuance was growing at a faster pace than traditional lending.
But mostly it signalled a boom in off-balance sheet lending, in areas like wealth-management products and letter-of-credit financing. WiC has reported on these trends too; in trust lending (issues 53, 74 and 78) and in commodity-backed financing in soya and copper (WiC110 and WiC103).
Here it’s worth reiterating the distinction between ‘shadow’ banking and ‘informal’ lending. Trust loans and commodity-backed financing are examples of shadow banking. The banks are doing the lending, although often away from their own balance sheets. As bank bosses have been told to cut back on loans to clients, their sponsorship of newer loan products has picked up.
By contrast, informal lending is conducted outside licenced financial channels, so we catch glimpses of it more anecdotally. WiC has reported on the private lending culture of Wenzhou (WiC63), as well as cases in which informal lending schemes have collapsed in Inner Mongolia (WiC109) and in Xiamen (WiC114).
So what are Zhang’s main conclusions on the credit picture being drawn by TSF-style analysis?
Incredibly, 47% of all new loans are coming from the shadow sector (in 2002 bank loans made up almost 100% of new lending). Thanks to that, true loan growth is far from slowing.
Another finding is that China’s economic growth is now more reliant on credit than ever before, with total social financing making up 44% of first quarter GDP growth.
Put another way, that means that each dollar of new growth is being fuelled by 44 cents of new credit, a record high. No wonder, then, that the PBoC is determined to change the terms of the debate.
The one important positive in Zhang’s report is that shadow bank lending – much of it beyond official reach – shows signs of being priced more by the market than by directive from above. Offered as evidence are the higher yields on wealth management products, or the rate companies are charging each other for bank-arranged entrusted loans (Phone firm Ningbo Bird lent a property company money at 18%, reports Bloomberg).
Not that the shadow banking sector is entirely unconnected to the more traditional world of government directive. New announcements on administrative tightening quickly transmit to off-balance sheet lending, putting up the effective cost of borrowing across the system.
But the higher rates in shadow lending contrast with policy limits set for traditional loans and deposits at the banks. And eventually, they suggest a natural brake on some of the expansion in wider credit.
In the medium term, Zhang wonders if all this off-balance sheet activity heralds another step towards a more liberalised interest rate environment. A case of the tail wagging the dog, perhaps?
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