China Macro:Aug money data;Strong M1number boding well for growth in 4Q

The PBoC released August money & credit data today (Friday). Overall, it ispretty positive and makes us more comfortable with our call for growthacceleration in 4Q. New loans were in line at RMB810bn (consensus:RMB850bn). M2 growth stayed flat, while M1 growth jumped, boding well foreconomic growth in the coming months.

M1 growth, a leading indicator of corporate activities, jumped for twoconsecutive months (Aug 9.3%; July 6.6%; June: 4.3%). It is rare for M1growth to see such a big rise except for Chinese New Year, suggesting thatfunding constraints for investment have been eased a lot. It is also in line withthe message coming from FAI funding conditions, which have improvedsignificantly since 2H15 (left chart). Note that in September 2012, M1 growthalso jumped, to 7.3% YoY from 4.5% in August. Then GDP growth reboundedto 8.0% YoY in 4Q12 from 7.4% in 3Q12.

Another interesting question is, Why has M2 growth held up in August despitecapital outflows? Last week, the PBoC announced that China’s FX reservesdropped by $94bn. Intuitively, lower FX reserves mean capital outflows, whichwould drain domestic liquidity and lower M2 growth. What is happening?The first thing is strong RMB loans. Total RMB loans outstanding increasedRMB810bn in August. But the number is much stronger than it appears,considering that the net issuance of local government bonds was RMB394bnin the month. Suppose all of the proceeds are used in local government debtswaps, ie, paying down the existing local government debt. Since 60% of localgovernment debt is in bank loans, the actual new bank loans in August couldbe RMB1,046bn (=810+394*0.6).

Admittedly, China’s commercial banks are more reluctant to make loans.

However, the share from policy banks has increased. In 1H15, the share oftotal loans from the China Development Bank (CDB) rose to 11% from 7%.

The share should see a further increase in 2H15 due to the recently liquidityinjection from FX reserves to the CDB.

The second thing is strong corporate bond issuance. Corporate bond netissuance amounted to RMB288bn in August, vs RMB193bn last August.

China eased the constraints for bond issuance earlier this year. We areseeing more Chinese developers switching from the offshore to the onshorebond market.

The third thing is that not all of the decline in FX reserves is due to capitaloutflows. Some of the loss is just converted from FX reserves owned by thePBoC to FX deposits by the private sector. In August, China’s FX depositsrose by RMB170bn, vs RMB95bn last August.