Monitor: Chinese Credit Crunch‏

Money market rates, swap interest rates and government bond yields are edging slightly higher. Higher interest rates appear to reflect mainly a conscious decision by People's Bank of China (PBoC) to tighten liquidity conditions slightly rather than money market stress as in June. Government bond yields and swap interest have edged higher in tandem with the swap-government bond spread largely unchanged. CDS-premiums for the Chinese banks have continued to decline and are currently close to the level before the money market stress in June.

PBoC appears to be draining liquidity from the interbank market through its open market operations as banks excess liquidity has been declining since June. This suggests PBoC has de-facto moved monetary policy in a slight tightening direction. There currently appear to be renewed capital inflows into China after China experienced slight capital flight in connection with the money market stress in June.

Credit expansion has eased slightly. There has been a substantial slowdown in shadow-finance, but this has to some degree been offset by faster credit expansion from banks. Particularly corporate bond-issuance and loans from trust funds have slowed markedly since June, suggesting possible slower investment demand ahead. Real money supply growth has also eased moderately, also suggesting growth in China could start to slow again in early 2014.

No clear signs yet of a slowdown in investment demand in the hard data. Fixed asset investment disappointed slightly in October, but overall our indicator for investment demand continues to show recovery in transport/public infrastructure, housing and manufacturing investment with particularly manufacturing investments strengthening in recent months.

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