To The Moon

China's October Financing Data Disappoints; Government Bonds Drive Growth Amid Lackluster Credit Demand

This article is written by Shernice, if you like my article please hit the like button. 

Trump’s policies typically strengthen the dollar, which tends to weaken the yuan, stabilize global markets, and put downward pressure on gold prices. Currently, the smartest investment might be in U.S. assets—buying U.S. stocks and holding dollars. If China announces a major stimulus, shorting Chinese markets could offer quick gains since such boosts tend to have fleeting effects, with market gains evaporating quickly. Despite this, many still hold the belief that Chinese stocks are due for a bull run, seeing them as undervalued compared to U.S. stocks, which they view as already overpriced.

Let’s start with China October’s financing data. Here’s a rule to know: when the Chinese government reports financing data and headlines it as “the first 10 months of the year,” it usually means October’s numbers weren’t great, so they’re not highlighting it alone. But if they say, “In October, financing was great,” then you know they’re proud of the numbers. This rule never fails.

This October, in the official headlines was “the first 10 months of the year,” indicating a less-than-ideal month. To get to the exact numbers for October, you have to do some math. When calculated, it turns out that October saw 1.4 trillion yuan in new financing, just shy of the market expectation of 1.44 trillion. Within that, RMB loans only grew by 500 billion yuan, missing the forecast of 609.3 billion by a significant margin.

Chinese banks don’t particularly like lending in the latter part of the year, especially in Q4. They often reserve projects to start strong in the new year. So, it’s not surprising that October saw only 500 billion in new RMB loans. Still, that’s 238.4 billion less than last year, highlighting the current lackluster credit demand.

The structure of financing has now become a pattern: government bonds are the main driving force. For example, this month, government bond financing increased by 1.05 trillion yuan, making up more than two-thirds of the total financing growth. Going forward, this will be the norm.

Let’s take a closer look at the structure of loans, which is something I’ve been tracking closely. Last month that I was curious about how many PRCs took out consumer loans to buy stocks around the National Day holiday when the central bank temporarily propped up the stock market. Now, October’s credit data provides some clues.

In October, new loans for households totaled 160 billion yuan. This is a bit better than last year, when short-term loans decreased by 105.3 billion, and long-term loans increased by 70.7 billion. This year, short-term loans rose by 49 billion, and long-term loans by 111 billion. The increase in short-term loans seems driven by two factors. First, consumer goods upgrade programs, like subsidies on platforms such as JD for Apple products, boosted demand. This aligns with reports from Taobao, where sales in electronics nearly doubled and home appliances saw a 350% increase, contributing to short-term credit growth. The other factor? Some of these loans likely went into the stock market. However, the total rise of 49 billion was less than I anticipated, suggesting that fewer people were eager to leverage up in the chinese stock market. This, in fact, is a positive sign for market stability, as it implies the market index is still supported unless major stakeholders start selling.

However, improved household credit doesn’t mean overall credit demand is on the rise. October's business loans tell a different story, with short-term loans down by 190 billion and long-term loans up by 190 billion, which is weaker than last year.

Then, looking at M1, a key economic indicator, we see a continued decline in October, though less severe, with a drop of 6.1%. Business demand deposits surged by 459.3 billion yuan despite a reduction in loan demand. Why? Likely due to companies selling stocks in early October rather than pledging them as collateral, showing a lack of confidence in China’s economic outlook.

This brings us to a notable judgment: the 300 billion yuan in central bank funds available for stock buybacks might not see much uptake due to low corporate demand. And although M2 grew by 7.5% year-on-year, it was largely driven by a 1.08 trillion surge in non-bank institution deposits. The source of these funds? Partly active trading in the stock market and partly from the central bank’s 500 billion currency swaps with non-bank institutions. This shift in the financing structure, along with M1 and M2 trends, reflects a state-led economy. Government subsidies drive consumption upgrades, government bonds fund investment, and the stock market is buoyed by the central bank.

Why is President Xi reluctant to issue more bonds? Because financial pressures are mounting, and revenue sources are limited.

And now, on U.S Vs China relations: Trump wins, capital markets in the U.S. will likely boom, while China grapples with instability. With recent events like the social unrest in Zhuhai and increased security around student activities, there’s a sense that China is under significant stress. 

Trump’s administration, based on announced appointments, is likely to pursue a hardline stance on China, setting the tone for U.S.-China relations in the coming years.

China is exploring ways to counterbalance this stance. They’re courting allies like Elon Musk, who is highly valued in China, but it’s unlikely Musk would leverage his relationship with China against the U.S. Instead, both parties have mutual needs but little control over one another. China is also looking to lower tariffs and attract investment from U.S. allies in Europe and Asia to counter U.S. sanctions. The EU, however, will likely hesitate, needing the U.S. more than China, especially given Russia’s proximity and the impact of China’s exports on the EU’s economy.

Domestically, China is trying to offset weaker external demand with domestic consumption. The central bank’s rhetoric suggests a shift in policy from aggressive debt issuance to structural reforms, although the real impact of these adjustments is uncertain. Some recent changes, like extending holiday breaks or reducing property deed taxes, show signs of an inward focus on boosting consumption, but it’s still a cautious approach. Given the limitations on income growth and the persistent reliance on real estate, these moves may have limited long-term impact, reinforcing my bearish outlook on China. Maintain sell on Chinese equities.

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