The encouraging signs behind China's record funding figures

January's data in fact underscores the tightening trend on the mainland, which will help avert the danger of a full-blown crisis in future years

PUBLISHED : Monday, 17 February, 2014, 4:47am
UPDATED : Monday, 17 February, 2014, 4:47am

The trouble with economic statistics is that it is all too easy to see whatever you want to in the data.

Take the monetary figures released by Beijing on Saturday. The bald numbers tell us that mainland banks last month made local and foreign-currency loans worth 1.48 trillion yuan (HK$1.9 trillion).

That's the highest monthly lending figure since mid-2009, when Beijing's economic stimulus effort was in full swing.

Whether you think this is a good or a bad thing depends on your point of view.

If you are worried about the effects of slowing growth on the mainland, as many stock market investors are, then you might well conclude that January's pick-up in bank lending is welcome news because it will help support economic growth for the rest of 2014.

On the other hand, if you fret that the mainland has become dependent on credit-fuelled investment to power growth, then you will see last month's surge in lending as evidence of Beijing's failure to reform the country's economic model.

Factor in other sources of financing - the capital markets and the mainland's off-balance-sheet shadow market - and both optimists and pessimists can find evidence to support their views.

Altogether, as the first chart shows, new funding measured by Beijing's "total social financing" indicator rose to a record 2.58 trillion yuan in January. Of that, 993 billion yuan was extended through the shadow financial system.

If you are in the camp that believes the mainland is overinvested and that returns on capital are falling dangerously, then you will worry that last month's surge in new credit heightens the chances of a nasty financial crisis further down the road.

On the other hand, if you are a glass-half-full type, you will be encouraged by Saturday's figures.

The shadow market, you will note, made up a smaller proportion of total financing than in recent months, while the value of potentially troublesome new trust loans extended last month fell by half compared with January 2013. In contrast, longer-term equity financing picked up handsomely.

In short, you can read pretty much whatever you want to into last month's data.

As usual, if we want a clearer perspective, we have to take a step or two backwards.

Yes, new financing accelerated in January. But lending always picks up in January, and this year activity may have been front-loaded ahead of the earlier Lunar New Year holiday.

In any case, although the absolute number for new financing was a record, in real terms, relative to the size of the overall economy, last month's figure represented a deceleration compared with January 2013.

And if you take a further step back, it is plain that monetary conditions on the mainland have been tightening over recent months.

The second chart shows the year-on-year changes in total new financing since the beginning of 2007, depicted as a three-month moving average in order to smooth out some of the noise in the monthly figures.

With the data presented like this, we can clearly see the investment boom that preceded the 2008 Beijing Olympics.

Next, we have the massive lending binge that financed the government's 2009 stimulus programme.

Then, we see the credit expansion that smoothed the transition to a new leadership over 2012 and early 2013.

Finally, we can see how the authorities have sought to tighten policy over the past six months.

You can still take this tightening two ways. It will weigh on growth and may heighten the risk of near-term defaults. On the other hand, it is long overdue and will help avert the danger of a full-blown crisis in future years.

On balance, while this tightening trend may be bad for markets, it's very good for the mainland as a whole.