Summary:

In October, China experienced a surge in the flow of total social financing (TSF), a key metric for the total credit volume. The TSF soared to 1.85 trillion RMB, doubling from a year ago. Despite TSF being a general indicator of economic activity, this sharp rise should not be mistaken for a sign of economic recovery.

First, government bonds (flow) saw an unusual increase of over 460%, which dominated the TSF surge. Market participants have widely interpreted this move as supporting the debt-ridden local economies.

Second, corporate bonds and equity finance have plummeted, indicating reduced borrowing among larger companies. Though this is not corroborated by PMI data which suggests that larger enterprises are still expanding.  A plausible explanation is that government bonds are enabling local governments to settle debts owed to large enterprises, thereby decreasing these firms’ need for additional liquidity.

Third, state-owned commercial banks appear to be expanding their loan portfolios, at the expense of assuming greater risks. They are transferring off-balance-sheet undiscounted banker’s acceptance – typically used for small and medium enterprises (SMEs) — to on-balance-sheet loans. This policy action, while commendable for providing timely credit, also signals vulnerability, as evidenced by weak PMI data for SMEs.

Highlights:

• China’s Total Social Financing (TSF) doubled in October to 1.85 trillion RMB, indicating increased economic activity but not necessarily recovery.
• A closer examination of the data suggests weakening activities among the small and medium enterprises, while a surge in government bonds supports large enterprises.
• This analysis underscores the multifacetedness of interpreting financial data, highlighting the need for a nuanced understanding of economic indicators.

Article By GUO, Meiling

Graphic By GE, Yixuan