Deflation: Chinese Shadow Banking Contracted in April
Guotai Junan estimates non-standard bank lending contracted 800 billion yuan in April as deleveraging policies finally had an effect.
Although banks in China can be politically coerced into lending (and to take bailouts in America), it is still the case that banks are the front line of credit creation, and hence money supply. If shadow banking contracts, the money supply contracts. Asset prices and economic growth will soon be on a downward trajectory if there’s no credit or money supply growth to offset it.
With the detailed financial data released in April, Guotai Junan Bank team found that the real start to shrink the table is the bank. Credit Suisse Managing Director Tao Dong believes that banks are more scary than the central bank.
The Politburo meeting on 25 April will guard against financial risks to an unprecedented level, and the political will behind it is beyond doubt. Followed by a line of three will continue to introduce policies to promote financial deleveraging, the effect began to appear.
According to Guotai Junan bank team estimates, in April self-non-standard or non-bank contraction of about 800 billion yuan, the signal shows that financial leverage to achieve a certain effect, the bank began to shrink non-bank, non-standard business.
…Credit Suisse Managing Director Tao Dong that commercial banks to substantially shrink their own balance sheet will bring two effects:
1. credit contraction. A banking-led credit table, especially in the off-balance sheet business. As the credit expansion of the Chinese economy in the past few years basically completed by the expansion of the table, the sudden off-balance sheet of the impact of the number can be seen even more ferocious. Credit out of the economy and the real estate industry poses the risk, may be more than the cost of capital increases.
2. the cost of credit debt soaring and fund-raising capacity decline. Over the past two years, the overall level of leverage in the Chinese economy is still rising, but the fund-raising platform from the financial products to credit debt makes the cost of capital dropped significantly, raising funds is more standardized. Credit market changes in the market, may make a serious reliance on borrowing new debt and some of the old debt default risk increased significantly. At the same time, savings growth slowed down, banks compete for deposit war imminent, normalization of the monetary environment is by the money market “fake interest rate”, the real economy to the real economy to raise interest rates.
Tao Dong said that the recent Chinese economy is facing a sudden shortage of liquidity, mainly related to the bank’s off-balance sheet business contraction, the intensity may be higher than the performance of the data, the bond market performance reflects the credit environment changes. In order to ease the pressure, the central bank to restart the open market operations, but believe that the normalization of the monetary environment will continue, financial strong supervision will continue.
Tao Dong said that the normalization of the monetary environment, to prevent financial risks, strengthen supervision, eliminate financial corruption, long-term look is a good thing, but to prevent systemic risk necessary. But the departments have introduced measures, but in the manufacture of a superposition of resonance effect, may lead to the credit environment overkill. To prevent risks but become the source of the creation of new risks, and backfire. This is a need for vigilance