China Fails To Deliver Major Fiscal Stimulus At People’s Congress, Makes Many Promises Instead

Back in October, the latest credit impulse in China just rolled over and died.

Ahead of the actual news, MNI said “one source familiar with the data said new loans by the Big Four state-owned commercial banks in October plunged to a level that hasn’t been seen for many years.”

Sure enough, when the numbers hit, it wasn’t a pretty picture. RMB new loans came in at just CNY514bn in October – consensus was far higher at CNY800bn. That was down 6.3% Y/Y. Total social financing fell 29% Y/Y to CNY447 billion, down sharply from September’s CNY1.3 trillion print.

So what, did China do you ask? Well, they unleashed massive fiscal stimulus:

The deluge of fiscal spending was at least the most since May 2014, and seemed to prove that between an acute over-capacity problem and jitters from the reverse-wealth-effect created by last summer’s stock market collapse, businesses and consumers had no desire to borrow, while rising NPLs meant banks were reluctant to lend. As we said at the time, it looked like Beijing was finally prepared to acquiesce to incomparable, pet-rock hating PhD economists like Citi’s Willem Buiter who said the following summer:

Fiscal policy can undoubtedly come to the rescue and prevent a recession in China. The first-best would be for the central government to issue bonds to fund this fiscal stimulus and for the PBOC to buy them and either hold them forever or cancel them, with the PBOC monetizing these Treasury bond purchases. Such a ‘helicopter money drop’ is fiscally, financially and macro-economically prudent in current circumstances, with inflation well below target and likely to fall further.

As we never tire of mentioning, that idea is absurd on its face: you’re simply printing one paper liability and buying it with a another paper liability that you also print.

In any event, fast forward to January, and credit impulse was back with a vengeance, as the Chinese created a mammoth $520 billion in credit ahead on the Chinese New Year. Or, visually:

So China created half a QE3 in the space of just a month, or, as we quipped, “Minsky wants his chart back”.

The reason for the surge was largely the result of frontloading loans mostly at smaller banks, as well as lending to government projects in the first year of 13th Five Year Plan, which helped to boost loan growth. Many economists had expected loans to slow sharply in February as lending to government projects wound down.

However, it turns out this was just the start of China’s latest policy, which is really just a return to its old policy of flooding the economy with debt: as Market News reports expectations that “January’s surprisingly strong new loan growth would prove temporary may have been premature as bank officials in a number of Chinese cities say February new loans look to be just as strong, even with a week-long holiday in the middle of the month.”