Deleveraging punches bonds into technical knockout
Despite refreshingly comforting words in the People’s Bank of China statement, it is hard not to stare at the shockingly cruel numbers from the corporate bond market
Despite refreshingly comforting words in the People’s Bank of China statement alongside May’s monetary statistics, which surprised the market with a massive plunge in the growth of broad money supply, it is still hard not to stare – and jaws dropped to the desk – at the shockingly cruel numbers from the corporate bond market.
It was the fledgling bond market’s biggest outright contraction in history, as tracked by the Chinese central bank’s total social financing report. The unfavorable state in which the domestic bond market had fallen to by May, following a half-year long credit cleansing exercise, had resulted in sucking a quarter trillion yuan (US$36.7 billion) of liquidity out from the economy within a month.
It’s no wonder that the total new yuan loans for the month came in on the stronger side of forecasts. Without banks pumping in extra juice for the economy as bonds fell into a comatose state, China might have seen an even wider scale of slowdown that has so far been contained within the housing and infrastructure spaces.
That’s the risk that Beijing must be willing to bear the next time it permits its domestic AAA-rated corporate bond yields to spike up, in the name of knocking down leverage within the financial system, for example.
Yields on the most highly-rated corporate debts surged beyond 5% in the second week of May, shooting up from only ticks above 3% as recent as last October. Fortunately, bond yields have come off as prices recovered somewhat, now trading at around 4.75% as of mid-June.
The country’s banks have added 1.11 trillion yuan of new bread-and-butter loans to their books in May, approximately 10% more than the market’s expectations and basically delivering the same magnitude of loan supply as April. Notably, credit for households expanded on the month against anticipation of a more cautious stance on mortgage approvals.
That indicates banks are not taking any chances to even come close to triggering a collapse in the housing sector despite its cappuccino-like frothiness enjoyed by so many. Household loans, which are predominantly mortgages, rose to 611 billion yuan in May from 565 billion yuan in April.
Medium and long-term households loans, the best monthly proxy for personal mortgages, rose 432.6 billion yuan in May, accounting for 40% of last month’s new bank lending. Lending to corporates and government departments totalled a similar 439.6 billion.
M2, a broad measure of money supply that covers cash in circulation and deposits, expanded only 9.6% in May, sharply below the downward sloping trend in place for the past three months.
It is nowhere near the M2 growth target for this year, set at around 12%.
The PBOC said in a separate statement that the slowdown in M2 came as the “result of the financial deleveraging and stricter supervisions,” and that a slower M2 growth could be a “new normal” in future months.
However, it dismissed any huge effect from the slowing M2, saying there is no need for excessive attention or interpretation.
The central bank said it would continue to push forward financial deleveraging while still trying to manage the strength and pace of its policies to balance deleveraging and stable liquidity.
There is one question left hanging regarding the bank lending reports, and that is why are short-term consumer loans on the rise? Could it be that banks, which have been told not to be too easy on approving mortgages, have decided to channel liquidity to homebuyers in the form of such shorter-term loans?
It’s not an unusual trick that developers around the world haven’t used, offering additional financing to lure anxious buyers into the joy of owning a very expensive asset.