􀀗 Banks’ willingness to lend is clearly a
positive for the economy
􀀗 The type and use of this liquidity are not
yet positive for profitability
􀀗 Contributions from China Economics,
Strategy, Banks and Forex teams
Liquidity, rather than investment demand, has driven the recent
surge in lending. This can continue, if not quite at the recent
stellar pace, with a record low loan to deposit ratio, potential
further reserve ratio cuts and rapidly growing deposits.
Most of the recent growth has been driven by commercial bills
— not necessarily generating economic value. Companies may
be papering over cracks in damaged balance sheets as demand
disappears. There are signs that corporate deposits are rising,
highlighting the potential arbitrage between current funding and
deposit rates. A cynic may point to the jump in loan growth and
volumes in the A-share markets…
We remain positive on growth in China’s economy in 2H.
The volume and speed at which liquidity is being delivered by
the banks suggest that when “real” demand appears it will be
met by supply. Fixed asset investment, whether as part of the
stimulus package or otherwise, should rise.
M1 is the key indicator for corporate profits and market
performance and thus far it remains subdued,
suggesting continued pricing pressure despite loan
growth. We are cautious on A shares, and H shares will
provide a safer haven.
For the banks, the near-term outlook is margin
compression, while longer-term lending will need to take on
a longer tenor to be profitable. Loan volume for the year
could be as high as RMB9.7trn, which will likely deliver
falling NPL ratios as the absolute level rises.
The risks of renminbi depreciation are growing, as severe
weakness in FDI and exports will counter any domestic
expansion. The USD-CNY NDFs are a buy on the view that
the market will begin to price such an outcome.