Stealth easing and the dreadful L-shape recovery in China27 April, 2012, 12:56. Posted by Zarathustra
A few days ago, I mentioned some stealth easing happening in the residential mortgage markets, where mortgages rates have come down somewhat and mortgages are easier to come by.
With March strong loan growth, stealth easing is happening even though the more aggressive easing actions like cutting reserve requirement ratio has not happened.
In his latest note, Dong Tao of Credit Suisse suggests that banks are more willing to lend then they were last year, with exports improved very slightly, infrastructure projects resumed and first-time home buyers encouraged, he think his looks like that the risk of a hard landing is now removed.
But be ware. This is when the good news ends.
Dong Tao provides some rather interesting observation here:
There is an unstated but important change in the tide lately. Firstly, we relate what we believe to be anecdotal evidence of a changing trend. One of our business contacts recently indicated that in the past few weeks, he has been approached by four banks saying that their credit lines were now available to him. This is in sharp contrast to the situation in the second half of last year. At that time, our contact was searching tirelessly for available credit lines, and banks told him “no” decisively. However, our contact was currently able to respond “no” decisively to these same banks.
So banks are willing to lend, but businesses are not willing to borrow. Also, he noted that new loans in the recent months are dominated by short term loans and discounted bills, with medium- to long-term loans growth remarkably weak. That confirms the kind of picture we saw in the first two months of the year where loan growth figures disappointed. It also highlights that companies are much less willing now to take on long-term liabilities to invest.
Dong Tao puts it better than I did:
In our opinion, the constraint to growth last year was policy restrictions, but now it has shifted to demand limitation. With the exceptions to some pockets of the economy, such as property developers in particular, bank lending has become more available lately, not just to the SOEs but also to the SMEs and local governments. However, outside of local governments’ infrastructure projects, the interest in making investments now in the private sector is low. Among the infrastructure projects, although some construction activities have been resumed, we have observed few new projects getting started, unusually low for the second year of a five-year plan cycle.
Just how uninterested businesses are in investing:
Despite some renewed activity in infrastructure projects, interest for conducting industrial investments and real estate investments remains low. In our view, the interest level is probably as low as during the deflation period under Zhu Rongji’s administration a decade ago.
In case you can’t remember when he is referring to, this is the reminder:
Source: National Bureau of Statistics
Finally, while everyone else believes growth has bottomed and that China’s growth will reaccelerate again, Dong Tao thinks instead that the recovery will be an L-shape one:
We see an L-shape recovery in China. Sequential growth at 7.4% qoq annualized in 1Q12 is likely to be the bottom of growth for this cycle, barring a collapse of the property market, but a rebound is expected to be uncharacteristically muted. We are currently projecting the quarter-on-quarter annualized GDP growth to improve for the following three quarters, though on a year-on-year basis, we expect growth to remain flattish. We would like to reiterate our core view that the Chinese economy has entered a period of subdued growth, combined with a weak credit cycle, a weak export cycle, a weak property cycle, and a weak SME cycle. Nonetheless, we think the economy has probably found its bottom on a sequential basis in 1Q12.