This page tracks our ongoing investigation into the Chinese financial system.
It contains a mixture of live updating charts and static data visualizations, as well as our ongoing synthesis into the conditions in this critical market.
While Chinese policy makers continue to stress the need for both a deleveraging and a restructuring of the local economy, when we look at the financial system in China, we see little to no evidence that this fundamental shift is occuring.
- Credit growth continues at an unsustainable pace.
- Investment in physical assets remains a disproportionate share of the local economy.
- The ever-evolving chimera of the Chinese shadow banking system continues to convert household savings into credit to support industries which have been deemed uncompetitive and in need of restructuring.
- Financial conditions remain relatively easy, and asset price inflation continues apace.
- While there has been some movement towards restructuring inefficient and over-levered corporations, there has been no large-scale accounting for the magnitude and breadth of the losses in the financial system.
In a western market economy, market prices could help create transparency about the magnitude and location of the losses in the financial system. Investors would weigh the likelihood of permanent capital loss and differentiate between good and poor credits.
As long as financial conditions remain sufficiently easy, we believe this process of discovery cannot occur. Forced restructurings, debt-for-equity swaps have been put forward as potential policy tools, by and large the system continues unchanged.
In spite of much talk of the need for deleveraging, we see little to no evidence that the pace of credit creation in China has slowed.
Borrowing costs are marginally higher (consistent with higher global rates over the past year), but still not to levels that put stress on marginal borrowers.
Bank equities in China provide some window into what's happening in the credit pipes. Bank stocks are reasonably healthy, in spite of the deterioration in credit conditions.
Interesting how correlated bank stocks are among the Big 5 national banks, while meaningful dispersion exists among the JSC and City Commercial Banks.
Real Estate stocks (REITs) and steel/iron prices suggest that prices for real assets in China continue to surge.
The PBoC continues to tightly manage the exchange rate, both via intervention in currency markets and through policy channels. The recent depreciation looks to be a desired outcome from loosening the capital charges for banks FX market making operations. Interesting how policymakers find it easy to implement regulatory changes that are successful at stemming capital flows, but remain ineffective when it comes to policy that would materially slow the pace of leveraging in the local economy.
Though off-shore funding markets have been acting up...
FX vols have sold off, though still higher than before the first deval in August 2015.
Tightening by the Fed in June would put additional pressure on the PBoC...
Surveys of conditions facing business remain relatively bullish.
We are tracking indicators of economic activity in China. PMIs usually convey information as to the conditions in the corporate sector, but official stats (the blue and white lines) have had much less volatility (since the crisis) than one would expect given the swings in credit conditions and economic activity in China experienced by corporations.
So while we remain somewhat skeptical of PMIs as accurate representations of conditions, it does appear that the explosion in credit has supported Chinese industry through what was a difficult time in late 2015-early 2016.
Looking at the raw, unadjusted credit creation numbers for China is interesting. Not least for the inherent volatility (and the interesting observation of the annual January surge, potentially in reaction to domestic liquidity tightness from outflows), but also the simple reminder that credit is still being created at a furious pace.