My Blog

April 15, 2008

TUE 15 APR

New loans exceeded the loan cap By Michael Pettis

The sudden spate of figures coming out over the past three days has meant that some of the things I like to discuss on this blog had to be pushed back a bit.  The most interesting of these things, for me, was the new lending numbers released late last week.

 

New loans in March totaled RMB 283 billion.  This was after February’s RMB 242 billion and January’s rather shocking RMB 804 billion jump in new loans.  The total for the first quarter, then, was RMB 1.33 trillion.

 

Since the loan cap for the first quarter was RMB 1.26 trillion, we have exceeded the cap by 5.5%.  This is not a huge miss given some of the other experiences we’ve had with loan caps, but it does show that the ferocious new loan caps proposed late last year are not as ferocious as all that.  The bad weather early in the year and the concerns about the impact of a US slowdown have made it easy for policy-makers to relax their overheating concerns slightly.

 

Is this justified?  I am not so sure that it is.  First of all it is hard to see much impact of a US slowdown given the still-strong growth in total exports.  It is true that US export growth has slowed markedly, but since this has more than fully been taken up by the growth in exports to Europe I would argue that the slowing US export growth has more to do with the weakness of the dollar against the euro than it did with reduced demand from the US, especially as the latest US trade numbers have shown a surprising increase in US imports recently.

 

Second, with China’s GDP growth for the first quarter of 2008 expected to come in at 10.6% (the data release is set for tomorrow, but we’ve had enough leaks to be pretty certain of both the GDP growth numbers and the inflation numbers), it is not easy to make the argument that global conditions have put a serious crimp on Chinese growth.  It seems to me we are still in overheating stage.

 

Still, I don’t think I am too concerned about their relaxing the loan caps.  I think the overheating is a monetary problem, not a lending problem.  The banks are only the medium though which excess money creation is converted into excess investment, and attempts to constrain their role are likely only to push them out of the intermediation loop.  That would, in my opinion, reduce PBoC control even more.  As long as this thing is going gangbusters we might as well have it happen via the banking system – at least the PBoC has some control there and the banking numbers are reasonably more transparent, although of course this does increase the risk of a banking sector crisis, something not to be passed over glibly.

 

On a different note, yesterday Xinhua had an interesting article on new developments in the corporate bond market.  According to the article:

 

Chinese companies will no longer need the central bank's approval when issuing short-term bonds on the inter-bank market amidst government efforts to boost direct financing and reduce bank loan risks.

The People's Bank of China (PBOC) announced non-financial companies could issue bonds with maturities of less than one year on the inter-bank market without its approval from April 15.  Instead, they would only need to register at the National Association of Financial Market Institutional Investors set up in September, the PBOC said in a statement issued late on Saturday.

 

It said other negotiable notes “with a certain maturity” issued by non-financial companies on the inter-bank bond market wouldn't need administrative examination and approval either. Nor would future innovative financing tools on the market.  China has vowed to develop its capital market and broaden direct financing channels to curb enterprises’ heavy reliance on bank credit.

 

Anything that speeds up the development of the corporate bond market is good for China in the medium term because, as things currently stand, Chinese companies rely too heavily on banks for their financing needs, and that keeps the economy hostage to adverse developments in the banking system. Of course in the near term making it easier to issue only short-term bonds does come with a risk.  Bond financing is much cheaper than loan financing, and the main thing that has kept corporations from turning more aggressively to the bond market has been the difficulty in getting approval.  By relaxing the approval process for issuing short-term bonds I suspect we may quickly see a significant increase in issuance.

 

If this increase is matched by a reduction in short-term bank loans, it won’t matter much, but if it comes at the expense of a shortening of debt maturities on corporate balance sheets, it will almost certainly increase systemic risk.  My assistant Oliver Shang Ning sent me a breakdown of debt levels and debt maturities for the non-financial corporate sector last week.  I haven’t had a chance to give it more than a cursory glance, but it seems to me that Chinese corporations are pretty highly levered with much of the debt in the form of short term debt.  They probably don’t need to increase their short-term debt levels.

 

But to return to more interesting (in the near term) topics, tomorrow at 2:30 CPI numbers come out.  We pretty much already know that headline CPI inflation is going to be 8.3%.  Far more interesting will be the breakdown between food and non-food inflation.