Money changer's signs hang in a street in Hong Kong on October 16, 2008. Hong Kong celebrates 25 years of a currency peg with the US Dollar which links with the Hong Kong dollar at a fixed rate, designed to reduce extreme volatility in the currency markets. AFP PHOTO/MIKE CLARK / AFP PHOTO / MIKE CLARKE

New yuan loans handed out by Chinese banks in November expanded about 10%, more than analysts had been expecting, while the broad M2 money supply figure came in at a respectable 11.4% year-on-year gain. At first glance these numbers portray an image of China’s financial system gliding along in style, buttressing resoundingly strong foreign trade, retail sales, and manufacturing reports earlier this month.

A closer look, however, reveals three notable kinks that are probably causing butterflies in the stomachs of Beijing’s policy-setting heavyweights.

The first and most surprising revelation is that foreign currency deposits in China jumped US$20.4 billion to a record high of US$702.6 billion at the end of November. That normally would not have raised any eyebrows, but the fact that it coincided with a dramatic US$69.1 billion drop in the country’s foreign exchange reserves makes it much more alarming.

China’s forex holdings dipped 2.2% to US$3.052 trillion dollars last month, even as the People’s Bank of China fought a rearguard action against the army of yuan holders looking to exchange into dollars and other foreign currencies.

The enormous desire of Chinese households and corporates alike to accumulate foreign currencies suggests that capital flight pressure emanating domestically is gathering momentum. That may pose a threat to the monetary authority’s balancing acts of maintaining yuan stability and strength, a political mandate.

House of extravagant credit

The second key observation is that mortgages remain the predominant driver of bank lending growth. More than 70% of November’s nearly 800 billion yuan of loans were long-term household loans, a close proxy for residential mortgages.

This makes it the sixth month since April that real estate loans accounted for over half of the banking sector’s new loan book, underscoring the crucial role debt played in this year’s property price surge. China’s Central Economic Work Conference, the policy-setting forum that met this week to plan out next year’s agenda, stressed the need to “strive to prevent and control asset bubbles”

Clearly, the latest loan breakdown shows the limited success of government efforts since early October to damp demand through administrative measures that included stricter loan approval and caps on purchases.

China’s debt-fueled housing recovery is a doubled-edged sword, and the policy tilt is to shun all speculative buying and to restore calm in the market. That has the ruling Politburo tasking the government with devising a new “long-term property sector development mechanism” in 2017.

Shadow banking comeback

The third takeaway lies within the extraordinary large jump in so-called total social financing, which suggests a resurgence in shadow banking activities, the early arrival of a year-end phenomenon, or both.

TSF — a catch-all gauge of lending that includes all new loans, capital-markets fundraising and shadow banking — nearly doubled from October to a whopping 1.74 trillion yuan.

Looking at the data for the past three years, it is clear that shadow banking channels provide a great deal of financing in year-end months such as December and January. A spike in November is slightly unusual.

Regulators are sure to be on their toes trying to see what the figures are for the coming months as no clear explanation has been provided. This could be the start of a new era for regional and provincial AMCs (asset management companies), in which these bad-debt cleanup conduits offer local governments fresh capital in exchange for stakes in “zombie state enterprises.”

At 479.2 billion yuan, calculated by summing the three off-balance sheet financing channels of entrusted loans, trust loans, and undiscounted bankers acceptances, China’s shadow banking provided more liquidity in a single month than the first 10 months combined.

The numbers in the PBOC report:

  • 794.6 billion yuan (US$115 billion) in net new loans were given out by Chinese banks in November, 85.7 billion yuan up on October.
  • Analysts polled by Reuters had expected US$720 billion.
  • Mid- and long-term lending to households — mostly comprised of home mortgages — accounted for 71.6% of all new loans issued.
  • Foreign currency deposits soared 11.4% y-on-y to US$20.4 billion.
  • M2 grew 11.4% y-on-y to 153.04 trillion yuan.
  • TSF: New entrusted and trust loans amounted to 361.9 billion yuan, while undiscounted bankers acceptances came in at 117.3 billion.