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China's Weak Credit Transmission

Published 05/06/2013, 01:51 AM
Updated 07/09/2023, 06:31 AM
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China is awash with liquidity. New domestic bank loans have seen some of the strongest growth in years, and broad money supply is increasing at nearly 16% per year. Furthermore, property loans have risen 16.4% from the previous year to 13 trillion yuan ($2 trillion).

China-New Loans
The increased liquidity is now visible in China's money markets, with short-term interbank rates declining in recent months.

SHIBOR curve
Capital is also pouring in from abroad: investors are attempting to escape the zero-rate environments many developed nations are facing. The demand for yuan has been quite strong, driving the CNY to new record highs.

USDCNY
In the past, improved credit/liquidity conditions would result in stronger economic activity, particularly in manufacturing. That's no longer the case.

China manufacturing PMI

It seems that China has caught a developed nations' disease in which stimulus no longer translates into improved growth. As was the case in the eurozone, China is suffering from what economists call "weak monetary transmission", a condition in which credit/liquidity is not getting to the areas of the economy where it's most needed (and in some cases there is simply no demand for credit).

DB: - The divergence between hard economic data and the enormous expansion of liquidity since the beginning of the year suggests that credit transmission mechanisms have broken down - and the chances of a credit crunch are growing.

DB calls this the "law of diminishing returns" - more credit doesn't mean stronger growth:

Broken monetary transmission
All this liquidity (which started last year) may have avoided a "hard landing", but the bet on a renewed growth spurt for China's stimulus has not worked out so far.

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