China’s record funding expansion this year may be overstated in part because of double-counting, say Credit Suisse Group AG and Bank of America Corp. analysts trying to reconcile the data with weaker economic growth.
Some Chinese companies may use loans to buy wealth management products that are recorded a second time in another category, Vincent Chan, a Credit Suisse analyst in Hong Kong, wrote in a June 5 report, citing people he didn’t identify at the central bank and banking regulator. Bank of America estimates that double-counting explains 2.7 percentage points of a 12-point gap between first-quarter growth in outstanding credit and nominal gross domestic product.
The concerns echo doubts about Chinese trade figures that helped trigger an official crackdown on false reporting, resulting in May export growth forecast to be about half of April’s gains in data due tomorrow. While the estimated distortions in the credit numbers are smaller, they may provide one part of the explanation for the inconsistency between growth in financing and an economic slowdown.
“The statistics errors in total social financing this year are larger than normal, and it’s mainly caused by double counting,” Zhu Haibin, chief China economist at JPMorgan Chase & Co., said at a briefing yesterday in Beijing.
The first quarter’s $1 trillion increase in economy-wide financing contrasted with an unexpected growth slowdown, suggesting China was becoming less responsive to credit.
The gap between lending and growth “has become more noticeable in recent months,” Zhu said. Another issue is that some Chinese companies have to borrow to cover working capital as accounts receivable rise, adding to the gap between credit and economic growth, Zhu said.
The People’s Bank of China, which releases the lending data, didn’t immediately respond to faxed questions seeking comment on the issue.
The rate China’s financial institutions charge one another on overnight loans jumped the most in almost two years as shrinking capital inflows led to a cash squeeze before a three-day holiday. The tightening of liquidity in the interbank market is a risk to the economy given “high leverage and the fact that shadow banking activity continues to flourish,” Zhang Zhiwei, chief China economist at Nomura Holdings Inc. in Hong Kong, said in a report today.
The MSCI Asia Pacific Index of stocks fell 0.3 percent as of 4:21 p.m. in Tokyo, while the benchmark Shanghai Composite Index dropped for a seventh day, the longest losing streak in almost a year.
Lu Ting, head of Greater China economics at Bank of America in Hong Kong, said outstanding credit may be overstated by 3.6 trillion yuan ($587 billion) out of about 90 trillion yuan as of April. The double-counting issue flared up in mid-2012 when some large state-owned enterprises took advantage of cheap bond financing to then re-lend funds through other channels, Lu said in a report yesterday.
Loans to finance fake trade settlement accounted for about 0.3 percentage point of the 12-point credit-GDP gap, Lu said.
Data due over the next week from the PBOC may show new local-currency loans were 815 billion yuan last month, based on the median estimate of 34 analysts surveyed by Bloomberg News, compared with 792.9 billion yuan in April and 793.2 billion yuan in May 2012.
Estimates from nine analysts for aggregate financing in May range from 1.5 trillion yuan to 1.8 trillion yuan, after April’s 1.75 trillion yuan.
Trade figures due tomorrow from the General Administration of Customs will be followed June 9 by monthly data from the National Bureau of Statistics on inflation, industrial production and retail sales.
Credit Suisse said the PBOC and China Banking Regulatory Commission highlighted in meetings with Credit Suisse in Beijing three possible causes for overstated credit growth: bill financing for non-existent trade; double-counting of credit used to buy wealth-management products; and new loans that highly leveraged companies are using to pay interest.
At the same time, the gap between funding growth and the pace of the nation’s expansion can also be explained by other reasons, including a time lag as credit filters through the economy, and weakness in industrial investment and private consumption, Credit Suisse’s Chan wrote.
Economists at Deutsche Bank AG and HSBC Holdings Plc also said double counting is an issue. China’s broad credit environment “is not as accommodative as the headline aggregate financing number showed” partly because of double counting, Ma Jun, Deutsche Bank’s chief economist for Greater China in Hong Kong, wrote in a note.
The weak link between credit growth and economic performance was one reason for JPMorgan’s latest cut in its China GDP forecast, Zhu said. The bank last month reduced its 2013 growth projection to 7.6 percent from 7.8 percent. The economy expanded 7.7 percent in the first quarter.
The central bank started releasing aggregate financing data in 2011 to provide a broad picture of funding, as the traditional bank-lending indicator became insufficient, accounting for less than half of the total.
The measure, which includes new bank loans, trust loans, bonds and commercial bills, rose 58 percent to a record 6.16 trillion yuan in the first quarter of this year.
April’s new aggregate financing of 1.75 trillion yuan included 792.9 billion yuan in local-currency loans, 220.9 billion yuan from commercial bills, 195.3 billion yuan from trust loans, 192.6 billion yuan from entrusted loans, 190 billion yuan from bond issuance, 84.7 billion yuan from foreign-currency loans and 27.4 billion yuan from stock sales, PBOC data showed.
“Not all funds raised have been used to finance economic growth,” said Sun Junwei, a Beijing-based economist at HSBC. While some non-bank lending may have been double-counted, it’s not so much as to negate the indicator’s value in measuring the flow of credit to the economy, Sun said.
Elsewhere in Asia today, South Korea said first-quarter GDP rose 0.8 percent from the previous period, revising the prior estimate of a 0.9 percent expansion. Sri Lanka’s central bank left benchmark interest rates unchanged.
In Europe, German exports rose more than economists forecast in April. The U.S. releases employment figures for May, with nonfarm payrolls projected to rise by 163,000 people, compared with 165,000 in April, as the jobless rate probably held at 7.5 percent.
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