And my respect for them has gone up immensely.
In their attempt to clamp down on the massive, and growing, shadow banking system, the new administration has pushed total social financing dramatically down, from $410 billion in March to $200 million in May, Nomura’s data. Manufacturing has contracted for two consecutive months, HSBC’s PMI data revealed on Thursday, as the index hit nine month lows.
Credit growth is out of control in China, where it’s currently twice as big as GDP and growing twice as fast. As I previously reported, overall credit has grown from $9 trillion to $23 trillion in the five years since the implosion of Lehman Brothers, with credit-to-GDP going from 75% to about 200%. About $5.6 trillion of that represented non-loan credit, with nearly $2 trillion extended by opaque non-bank financial institutions. According to Fitch, more than $2 trillion in credit is connected to informal securitization of bank assets in so-called wealth management products (WMP).
“China is displaying the same three symptoms that Japan, the U.S., and parts of Europe all showed before suffering financial crises,” Nomura’s research team noted, “a rapid build-up of leverage, elevated property prices, and a decline in potential growth.”
Indeed, the current administration has acknowledged this, and is therefore clamping down on the shadow banking system, understanding the trade-off between short- and longer-term objectives. In terms of the liquidity crunch, it was in great part a consequence of the People’s Bank of China (PBoC) refusing to inject liquidity in the system, which, according to Nomura, is a calculated bet.
That takes some serious balls, as China's social arrangement has been predicated on unending growth. For China to be the first nation to pull the ripcord in the inflationary race to the bottom would have been impressive anyway. But to do so in the face of a rising population that can't take solace in other quality of life benefits like freedom of speech when employment goes down is especially brave.
The new government is thinking long-term, and that will automatically put them at an advantage to other nations, even if the short term effects are nasty.
It could also be said that China has just proved itself to be one of the few nations left that has a government. Or at least, a government as an independent entity. The rest are all still ruled by the bankers.