China's Credit Tightening and Financial Outflows

Some initial thoughts based on the AFRE, banking, and preliminary balance of payments numbers

In my previous note I looked into how the downturns in China’s housing market and real exports were exacerbating the ongoing weakness in consumer spending. In this piece, I want to focus on the financial side of things.

The troubles in China’s housing market are largely attributable to deliberate policy choices to tighten financial conditions. One way to see this is to look at the flow of new credit, which the People’s Bank of China (PBOC) publishes each month. So far this year, the “incremental social financing”, also known as “aggregate financing to the real economy” (AFRE) was down about 15% compared to January-October 2020.

That’s the biggest drop, in percentage terms, since 2018. Back then, however, the contraction was entirely attributable to the government’s crackdown on the so-called “shadow” banking sector, with conventional bank lending and bond issuance rising briskly. This time around, the financial tightening is broad-based, with net bond issuance down by a third and the new flow of conventional yuan-denominated bank loans essentially flat for the first time ever.