Q2 2021 China Macro Data Recap

China’s Q2 macroeconomic data were broadly consistent with a slowing economy, following the pullback of last year’s stimulus measures to counter the effects of the pandemic. Quarter-on-quarter GDP data painted a far more dire picture of economic momentum than year-on-year data, and slowing credit growth will likely produce additional cyclical weakness later in the year. Exports continue to outperform expectations and power resilient industrial production growth rates, while commodity imports have moderated, consistent with slowing property and infrastructure construction. Monetary policy signals have turned more accommodative, but tightening fiscal policy is unlikely to meaningfully change this year.

Posted July 26, 2021
Share
Facebook Twitter Pinterest

Déjà Vu All Over Again

The late, great Yogi Berra once again hit the mark in characterizing China’s recent monetary policy actions. Using policy settings very similar to those in early 2018, the PBOC has combined regulatory tightening measures limiting overall credit growth with monetary easing steps, of which the latest was last Friday’s cut to banks’ reserve requirements. As cyclical economic momentum slows and credit growth decelerates, more monetary easing steps will be necessary to prevent broader financial risks from materializing.

At the same time, Beijing is currently facing difficult choices in deciding where to shore up the credibility of state guarantees, with financial pressure building on asset management company Huarong, China’s largest property developer Evergrande, and several local government financing vehicles (LGFVs). These choices will be critical for how markets evaluate credit risks across China’s financial markets in the years ahead.

Posted July 26, 2021
Share
Facebook Twitter Pinterest

Momentum for Monetary Easing Building, Banks Cut Deposit Rates

As the State Council calls for cutting banks’ funding costs via lower reserve requirements this evening, results from banks’ 2020 financial reports reveal that banks have actually added to longer-term, higher-cost deposits, while also increasing lending to state-owned firms, rather than the private sector. Both trends contradict Beijing’s objectives to channel lower-cost financing to the more productive sectors of the economy. As a result, the recent cut in banks’ effective long-term deposit rates will meaningfully reduce funding costs.

Banks’ asset quality improved last year, primarily because forbearance following the COVID-19 outbreak prevented recognition of bad loans. Non-performing assets will rebound as forbearance expires, eroding profitability and hurting banks’ capital adequacy levels. Recent policy changes also increase banks’ difficulties in selling bonds to supplement capital. Risks from smaller, increasingly fragile financial institutions pose the most significant threats to overall financial stability.

Posted July 26, 2021
Share
Facebook Twitter Pinterest