If you were wondering about the source of China’s latest economic ‘recovery’, wonder no more. Yesterday, we got news that China’s incredible credit creating apparatus is back on track.
That is, total credit creation almost doubled in August compared to July, to 1.57 trillion yuan, or a lazy US$257 billion. That’s about a US$3 trillion annualised addition to the nation’s stock of credit in a roughly US$8.3 trillion economy. That’s a 40% credit-to-GDP growth rate. If you’re wondering, that’s incredibly high.
As far as we’re concerned, the only miracle about China’s economy is how they have managed to keep credit growth running at such insanely strong levels for so long.
The latest numbers do, however, represent a bounce back from the mid-year slowdown. The August credit surge represented the first month of credit growth since March. Worryingly, new loans from banks accounted for only 45% of total credit creation, meaning the good old shadow banking sector is back in action, creating 55% of new loans for the month.
This just goes to show how sensitive China’s credit system is to the central planners’ whims. They try to ease their foot on the brakes and the slowdown becomes dangerous. Then they try to tap on the accelerator and wham! The whole apparatus produces another growth explosion.
This from Bloomberg sums up the problem well:
‘"If credit growth picks up persistently from here, China’s current growth recovery may well last a bit longer and go a bit further,” said Yao Wei, China economist at Societe Generale in Hong Kong. "However, that only adds to the downside risk afterwards, as the leverage of Chinese corporates and local governments keeps rising from the already alarmingly high level."’
It’s a delicate balancing act, and despite our contempt for central planning we admit it’s one the Chinese are just managing to hold together right now. But opting for credit growth each time there is a slowdown is not really holding it together, it’s making things worse…eventually.
But when is eventually? It’s certainly not something myopic markets really care about these days. Eventually is usually beyond the next quarterly return benchmark and it’s something investors/speculators worry about when it comes…eventually.
But we have an unfortunate affliction where we think about what happens ‘eventually’ a lot. We can’t help it. We figure that because no one else does, that’s where the potential opportunity lies.
You just need patience to follow such a strategy. Our newest colleague, editor of Gowdie Family Wealth Vern Gowdie, is one of the few people we know who probably has more patience in following an ‘eventually’ strategy than we do. You can see why, here.
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