Wednesday, February 19, 2014

When Credit Turns to Lead from Gold (excerpt)

The Chinese are scrambling to avert a credit crunch as they clamp down on the shadow banks by flooding the financial system with liquidity. How do you say “whatever” in Chinese? Let’s review the latest credit aggregates:

(1) Social financing. During January, China’s broadest measure of lending, a.k.a. “total social financing,” rose 2.58 trillion yuan, slightly exceeding the previous record high a year ago. In recent years, there has been a tendency for lending to surge in January just before the start of the Lunar New Year holiday. Nevertheless, over the past 12 months, social financing has increased by a near-record $2.80 trillion.

(2) Bank loans. January’s surge in social financing was led by a 1.32 trillion yuan ($216 billion) jump in bank loans. This is the largest one-month increase since January 2010. Over the past 12 months, banks loans are up $1.5 trillion, the most since October 2009, when the Chinese were still scrambling to recover from the global financial meltdown.

My assessment is that China’s real GDP will continue to grow around 7.5% with no immediate threat of a hard landing. Deflationary forces will be offset by the provision of lots of credit. However, China may have reached the tipping point where more credit is losing its effectiveness in halting deflation and stimulating growth. This is a long-term problem that many other countries are facing today. For any economy, credit is gold until it turns into lead.

Today's Morning Briefing: Credit Is Gold. (1) China’s great liquidity flood. (2) Bailouts for “Credit Equals Gold” and “Opulent Blessing.” (3) Orwellian economics: More credit to slow risky credit. (4) Social financing at $2.8 trillion over last 12 months. (5) Tipping point: When gold turns to lead. (6) PPI details show widespread deflation. (7) Technology and productivity boosting margins? (8) Not good for jobs and social stability. (9) Good news in China MSCI revenues and earnings. (10) Focus on overweight-rated S&P 500 IT. (More for subscribers.)

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