Growth in the broad credit measure total social finance (TSF) in July slowed to 15.7% from 16.5% y/y in June. Seasonally-adjusted TSF slowed markedly to just 0.7% m/m in July after increasing a solid 1.7% m/m in the previous month. While the weak credit growth in July to some degree is a payback from the extraordinary strong credit growth in June, it would be wrong to dismiss the weak credit growth as just a temporary 'blip' in light of the weak fixed investment data in for July and the decline in the flash HSBC/Markit manufacturing PMI in August.However, there are no signs of increasing stress in financial markets - on the contrary, our credit risk indicators have on balance improved slightly in August. Money market rates have declined slightly and the swap government bond spread has also continued to edge lower. Offshore CDS-premiums for Chinese banks and corporate bond spreads have been stable in the past month albeit spreads for lower quality corporate debt continue to trade at relatively stressed levels. In isolation, this suggests that the weak credit growth in July has been driven by weaker demand for credit rather than a crunch in credit supply.
Growth in shadow finance was weak in July although the overall picture in recent months has been stabilisation in the wake of a sharp slowdown. In recent months, a continued slowdown in loans from trust funds has been offset by strong corporate bond issuance. However, corporate bond issuance declined in July although issuance remains at a relatively high level. The lower corporate bond issuance in July might be a tentative sign that the boost from the government's mini-fiscal stimulus earlier this year has started to wane. The implication of the sharp slowdown in loans from trust funds is that corporations dependent on loans from trust funds currently face difficult refinancing conditions and high default risk not least in light of the substantial expiry of trust products in the coming quarters.
The housing market remains weak with new home sales continuing to decline in July and with no sign of an imminent turnaround in the housing market. The downward pressure on house prices appears to have intensified in July. Small- and medium-sized property developers have been particularly dependent on loans from trust funds and, for that reason, these property developers could be forced to liquidate inventories of unsold homes as new loans from trust funds have dried out.
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