China Credit Machine Shrivels After IMF Disclosure Request

China Credit Machine Shrivels After IMF Disclosure Request
A man walks past the headquarters of the People's Bank of China (PBoC), the central bank, in Beijing on Sept. 28, 2018. (Jason Lee/Reuters)
Chriss Street

China’s ‘Total Social Financing’ credit growth plunged by -55.3 percent in July as the IMF was calling for greater foreign exchange intervention transparency and disclosures.

July saw tremendous turmoil in China’s financial markets as protests in Hong Kong sped up capital flight, the People’s Bank of China (PBoC) was forced to seize insolvent Baoshang Bank and Bank of Jinzhou citing “serious” credit risks, and the annual rate of capital flight accelerated from $22 billion last year to a $139.2 billion annual rate.
Total Social Financing (TSF) is the Chinese term for real economy aggregate financing that includes public offerings, hitting an all-time high of $657.4 billion in January and was up at booming +10.9 percent, or $2.3 trillion, for 12 months through June. But TSF plunged by -55.3 percent from $322.9 billion in June to $178.6 billion in the month of July.

China’s TSF tends to seasonally slow in July, but it was down -18 percent from the same period last year and about -44 percent below Wall Street analysts’ forecast. A closer look at China credit and liquidity reveals that consumer loans, mostly mortgage, that had been growing by +16.5 percent over the past year and +138 percent over the last five years, plunged by $72.42 billion, or -23.5 percent.

But even more worrisome, China corporate lending tanked in July from $132 billion to $42.52 billion, or -67.3 percent. Overall July performance would have been worse, but the opening of China’s new STAR technology stock exchange helped corporate bond issuance almost doubled for the month to +$32 billion.

The International Monetary Fund (IMF) Board of Directors completed its consultations with the People’s Republic of China and issued its annual review on July 31. After years of praising economic growth, the opening sentence of the IMF report ominously states: “The Chinese economy is facing external headwinds and an uncertain environment.”
The IMF emphasized that resolution regarding Baoshang Bank marked the first PBoC takeover of a “zombie” bank with solvency and liquidity problems in 20 years. Coupled with the PBoC announcement in late June that “large depositors” of seized banks would suffer “haircuts” of principal and interest, China’s approximately 4,507 non-AAA rated banks saw sales of negotiable certificates of deposit crash by at least 50 percent.

The IMF Board commented that China’s $3.1 trillion in foreign exchange reserves “remain more than adequate,” but “stressed the urgent need” to address China’s macroeconomic data gaps to further improve data credibility and policy making.

The term “urgent need” refers to the People’s Bank of China’s new habit of using highly-opaque “forex swap” derivatives to manage foreign exchange variability, rather than the traditional intervention method of selling large quantities of U.S. dollars to buy yuan (renminbi).
The forex swap market is one way to hedge currency exchange rate fluctuations, but with Bank of International Settlements warning that notional value of outstanding OTC derivatives $595 trillion, over 7 times larger than the world’s annual gross domestic product, Wall Street Journal reported the PBoC has used state-owned banks as proxies to buy “masses of dollar-yuan swaps to build a stronger outlook for the renminbi.”
The day after the IMF issued its July 31 review, the long-stable exchange rate of the China’s Yuan Renminbi currency (CNY) began falling. Three trading days later, the exchange rate broke the 7 CNY to $1 for the first time in 11 years.
After the U.S. Treasury officially designated China as a currency manipulator, Pan Gongsheng, a vice-governor with the People’s Bank of China and the head of China’s State Administration of Foreign Exchange, wrote in an article that China is a big responsible country: “We will not engage in a competitive devaluation and won’t use the exchange rate as a tool to handle international trade disputes.”

But TS Lombard’s chief China economist Bo Zhuang told Forbes that China will devalue the yuan by 3 to 5 percent over the next two months, and then keep it stable for about six months before making the next depreciation of the yuan to 7.5 to the U.S. dollar within the next 18 months: “People in China know what’s coming. I would say that if China doesn’t get a deal with the U.S., you will see this kind of movement in the currency.”

Chriss Street is an expert in macroeconomics, technology, and national security. He has served as CEO of several companies and is an active writer with more than 1,500 publications. He also regularly provides strategy lectures to graduate students at top Southern California universities.