China credit data shows signs of economic slowdown, says Jefferies

Jefferies

The latest credit data from China has fuelled concerns that the country's authorities may face challenges in stimulating economic growth, a recent report titled, Pain and its limits, by Jefferies said.

The figures show a slowdown in Renminbi bank loan growth and private sector credit growth, while China's M2 money supply growth has slumped to an 11-month low.

As a response, the People's Bank of China (PBOC) has made its first rate-cuts since August 2022, reducing the seven-day reverse repo rate and the one-year medium-term lending facility (MLF) rate.

The deceleration in residential property sales, which was discussed extensively in earlier reports, has contributed to the lack of economic momentum, prompting the PBOC's rate cuts. "The absence of inflationary pressures provides room for the authorities to implement further easing measures. China's consumer price index (CPI) rose by a mere 0.2 percent YoY in May, while the producer price index (PPI) declined by 4.6 percent YoY," the report said.

FPIs continue to sell bonds, holding down by 22 percent

The Chinese government bond market has rallied following the rate cuts, with the 10-year government bond yield declining as per the report. Foreign investors have continued to sell, resulting in a 22 percent reduction in their holdings of China bonds from the peak recorded in January 2022. This suggests that despite the rally, foreign investors remain cautious about the Chinese market.

“In addition to the demand for credit, there are concerns about the supply of it in China. Banks are currently operating on a record low net interest margin of 1.74 percent as of Q1FY23, which has led to the decision to allow banks to cut deposit rates," said Jefferies.

"This move aims to boost growth and address the mounting pressures on local government finances. China's local government land sales revenue has declined by 21.7 percent YoY, impacting their ability to finance their obligations.”

Impact on Chinese capital markets

Despite the easing measures, there has been a relatively muted response in China-related markets. The CSI 300 Index and the Hang Seng Index have experienced modest gains since the rate cuts were announced. Both the indices have gained 2.1 percent and 2.2 percent since the announcement of rate cuts on Tuesday, the report pointed out.

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It is also the case that there has been a continuing decline in Southbound flows on the Hong Kong Stock connect even though ‘H’ shares are now trading at a 28 percent discount to their ‘A’ share counterparts. “The monthly Southbound net inflow has declined from HK$67.1 billion in March to HK$22.5 billion in May and only HK$1.7 billion so far in June.”

Challenges for the Chinese economy 

The question now arises whether more aggressive stimulus measures will be implemented in response to the lackluster market reaction and disappointing economic data.

“While the technocrats appear increasingly concerned, it is uncertain if President Xi Jinping shares the same level of concern. The slogan 'housing is for living in, not for speculation', which was toned down earlier this year, still reflects some level of government policy. Notably, official data suggests that residential property prices are rising in most cities, although the pace has slowed compared to previous months,” said the report.

A thin ray of hope for the major economy

With the Chinese consumer turning more and more risk-averse, there is a thin ray of hope. Household deposit growth has decelerated from its peak, indicating a potential reduction in risk-taking behaviour. “China household bank deposit growth has decelerated from a recent high of 18.3 percent YoY in February to 17.4 percent YoY in May.”

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China's oil import demand has surged, reaching levels comparable to mid-2020. This increase in crude oil and refined oil imports suggests ongoing economic activity in the country. “This is now running at nearly the peak level reached in mid-2020," the report said. China imports of crude oil and refined oil imports jumped 17 percent YoY to 56 million tonnes in May, or about 13.2 million barrels a day, only 1.2 percent below the peak of 56.7 million tonnes reached in June 2020.

Global investors lay off Chinese equities 

Jefferies believes that global investors are clearly avoiding the Chinese stock market as they shift their base to other economies like Japan. “The fact that global investors, as opposed to dedicated emerging market investors, do not want to invest in China stocks is increasingly understood. This has to be one explanation for the current fashion amongst foreigners to invest in Japanese stocks with the Nikkei and the Topix now at their highest levels since March 1990 and July 1990 respectively,” Jefferies said.