You would think, based on the CPI reading that was weaker than expected last night (which would make the Fed scream), that China has stopped flooding its economy's with loans and other shadow debt instruments. One would be mistaken.
The China Bureau of Labor Statistics announced on Tuesday that the March CPI was +0.7% year-on-year (compared to +1.0% consensus and 1.0% in Feb) and it is also the lowest increase monthly since Sept 2021 because of a large base.
In March, the inflation rate for fresh vegetables fell to -11.1% yoy from -3.8% yoy last month. The inflation rate for pork prices rose to +9.6% yoy this month (+3.9% yoy) from +3.9% yoy last February. Inflation of fresh vegetables dropped to -11.1% from -3.8% in February. Meanwhile, inflation in pork prices increased to +9.6% from +3.9% in February.
In March, the inflation rate for fuel costs fell to -6.4% yoy (vs. +0.5% yoy) from +0.6% in February. Fuel cost inflation dropped to -6.4% year-on-year in March (vs. a +0.5% yoy increase in February). Inflation of transportation equipment dropped to -3.3% in March (from -1.8% the previous month).
Inflation in the services sector rose to +0.8% year-on-year in March, up from +0.6% last month.
PPI inflation in March fell to -2.5% YoY from -1.4% YoY in February. This is in line with the consensus and the lowest level since June 2020, mainly due to the high base price of commodities. In March, PPI inflation for producer goods dropped to -3.4% from -2.0% in February. PPI inflation for consumer goods also decreased to +0.9% in March (compared to +1.1% in February). NBS stated that increased demand and infrastructure projects accelerated by the government drove up PPIs in cement and steel sector sequentially. However, year-over year PPI inflation declined due to a large base last year.
Goldman Sachs summarizes that the data continue to surprise on the downside, and companies seem reluctant to increase prices (in order for them to remain competitive), so the bank has
The CPI and PPI forecasts for 2023 were revised downwards to 1.8% and -1.0% respectively, from 2.2% and 0.5% previously.
The bank anticipates that the headline CPI will continue to rise modestly on an annual basis in the months ahead due to a rebound in the economy, but it should still remain below the PBOC target of 3%. PPI deflation could continue in the next few months.
If both CPI & PPI are missed, then what?
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Continued slide is hardly a sign that the economy is on its way to regaining momentum or that credit is being actively stimulated. Maybe
But it is not because you didn't try
Because China reported over night that Total Social Financing and March Loans data were well above expectations. This is a sign of the central bank's efforts to release more long-term liquid into the economy, and support bank lending.
The market was surprised by the total RMB loan, mainly due to medium-to-long term loans that were stronger.
Both the medium-to-long term borrowing of households (mostly mortgages), and that of corporations, improved in March. The growth of short-term loans and bill financing for households slowed down in March as compared to February.
The PBOC has released the following main figures:
New CNY Loans of 3890bn Yuan in March
Bloomberg consensus: RMB 3,300 billion
Outstanding CNY Loan Growth: 11.8% YoY in March, up from 11.6% YoY in February
Total social financing (TSF), 5,387bn Yuan in March
, vs. consensus 4565bn yuan.
This was the highest TSF injection ever for March
TSF growth in March: 10.0% year-over-year, compared to 9.9% in Feb. The implied monthly growth of TSF: 14.4% in march vs. 17,8% in February.
M2: 12.7% YoY in March
Bloomberg consensus: 12.7% year-over-year, down from 12.9% in February.
The number of new corporate long and mid-term loans, which are an indication of the willingness to invest in projects and capacity expansions, has increased from last year.
The government bond market remained strong, as local authorities announced plans to increase spending on major construction by 17% in this year.
Credit growth typically picks up towards the end of every quarter, as banks scramble to meet their lending targets. However, lending and financing activity was also stronger than expected during the first two month of this year. This is because government bond issuance surged as well as corporate credit demand started to recover after the abandonment Covid restrictions.
The composition of the loan data indicates that credit demand has improved in the last month.
Although news reports indicated some signs of financial releveraging amid falling interest rates.
The growth in total social financing, measured as an annualized rate of change from month to month, has slowed down since February. This is mainly due to lower corporate and government bonds issuance. The growth of M2 on a month-over-month basis accelerated in march, mainly due to strong credit data.
As mentioned above, a sign that housing demand is recovering across the country.
New household mid-and long-term loan, which is a proxy of mortgages, has risen strongly to its highest level since January 2022.
It's true, China is quietly reflating asset bubbles.
Although this massive injection of credit has not yet led to faster growth or higher prices, it is only a question of time.
Beijing is clearly aiming for a full-blown economy liftoff, and is willing to reflate another credit bubble in order to achieve this.
In fact, the PBOC increased cash injections in order to assist banks with tighter liquidity. Bloomberg Economics estimates that the PBOC released 500 billion yuan in long-term cash to the banking system last month by reducing the reserve ratio. In March, the central bank added more cash than it had in two years by launching its monthly medium-term loan operation.
If the credit growth trend continues into April and into May, this would translate to significant support for the recovery of the economy through investment financing.
Bloomberg cites Raymond Yeung as the chief economist for Greater China of Australia & New Zealand Banking Group.
The figures indicate that firms are using the loan support from the government more often. The figures also show that household demand for mortgages is recovering -- another indication that the property market's slump has begun to ease. We expect credit growth to continue in 2Q. It will be gradual, but we are encouraged by the looser policy and the broader recovery of demand.
David Qu of Bloomberg Economics, among others, has said that the RRR cuts alone and the record-breaking loans injected into the economy are not enough.
Beijing is expected to continue its easing and a reduction in the interest rate policy in the second quarter.
After the government reported weak inflation figures, expectations of policy easing continued to rise. Bonds rallied as the yield on 10-year notes recorded the largest one-day decline since December.
Bottom line: The 2008 deja vu meter has just gone off the charts. While the US is about sink into a depression and commercial real estate is set to crash, China is again set to be the world's economic dynamo, at a moment when the developed world is on the verge of maxing out. In 2008, China launched the largest credit expansion of modern history. This led to a historic growth spree and an exponential increase in debt that drove China's debt up to 300% GDP.
What's next? What happens next?