Financial data greatly exceeded expectations to drive social financing growth rate turned upward. February, social financing growth rate of 13.3% year-on-year, an increase of 0.3% from the previous month, social financing growth rate turned upward again. February, mainland China M2 growth rate of 10.1%, expected 9.4%, an increase of 0.7% from the previous month.
1 Credit lag
Looking at the central bank’s open market operations, the monetary policy was tight as the central bank made successive net fund withdrawals in the open market after the year, and the social financing data in February was much higher than expected, somewhat unexpectedly.
This may stem from the fact that in November 2020, due to the turmoil in the credit bond market, the central bank significantly eased monetary policy, compared to the ten-year Treasury bond yields, which began to decline in December last year, with the lowest yield stage occurring in late January 2021. It takes Time for market interest rates to transmit to real credit, resulting in February social finance growth lagging behind the decline in ten-year Treasury yields.
This also seems to corroborate with the SSE rising from 3465 to 3731 in February, after all, with so much money lent out, there will always be some flow into the stock market.
Financial Data Greatly Exceeded Expectations to Drive Social Financing Growth Turned Upward in February (Author’s Blog)
2 Signals of liquidity tightening
At the end of January, Ma Jun, a member of the Central Bank’s Monetary Policy Committee, cautioned that “bubbles have emerged in some areas”. He argued that leverage is rising very fast in mainland China and bubbles are showing up in some areas, which calls for monetary policy adjustments. This seems to have hinted at the direction of liquidity in the later part of the year.
After the New Year holidays in 2021, the central bank made continuous net fund withdrawals in the open market, liquidity began to tighten and the 10-year government bond yields began to rise. on March 2, Guo Shuqing, chairman of the Communist Party of China’s Banking and Insurance Regulatory Commission, said: “The whole market interest rates are rising this year, and it is estimated that the interest rates on our loans will also rise”. Once again, this confirmed the direction of market interest rates.
In mid-to-late February, mainland China’s stock market began to dip continuously and started to enter the bubble squeezing phase. This also seemed to confirm that market interest rates, which had been tightening since late January, were beginning to pass through to real credit.
Liquidity is, indeed, tightening.
3 Liquidity constraints at a glance
1) The government work report sets the tone that mainland China’s GDP will grow by more than 6% in 2021 and prices will grow by about 3%. The two add up to 9%. Previous government work reports proposed that M2 and social finance growth should match nominal GDP, so social finance and M2 growth should be around 9%, and social finance is currently 13.3%, about half over the target. Social finance has a lot of room for compression.
2) Interest rate spread constraint. China and the United States need to maintain a relatively stable interest rate differential to stay in the comfort zone, the long-term upward trend of U.S. bond yields or influence the Chinese bond to follow. March 10 data, the U.S. CPI rose 1.7% year-on-year, after the release of the data, the 10-year U.S. bond yields rose, 1.9 trillion stimulus package will also give U.S. bond yields upward to provide a boost.
(3) mainland China’s industrial producer price index (PPI) rose 1.7% year-on-year, 1.4% faster than last month; purchase price index grew even faster, up 2.4% year-on-year, a variety of raw materials rose rapidly, copper rose 40%, paper rose 50%, zinc rose 50%, plastic rose 35%, IC rose 100%. The flood of liquidity will fuel this trend.
4) Macro leverage in 2020 climbs to 270.1% from 246.5% at the end of 2019, with financial risks accumulating. Ma Jun reminded in January of the risk of stock and housing, and Guo Shuqing repeatedly reminded that “the housing market is already China’s biggest gray rhinoceros” and “the tendency of financialization of real estate to bubble is stronger”.
Whether from the government work report, or from the internal (price) external (interest rate differential) constraints, liquidity is clearly no room for waves up.
The new investment logic still has to be structured on top of the liquidity tightening.
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