Hooked... the waters of PBOC monetary policy run deep and are murky. Who knows where the big fish are swimming. Photo: Reuters

Has China’s monetary policy embarked on a tightening cycle that might finally drive a stake through all the zombie companies out there and burst every gleaming speculative bubble in sight?

That’s the hundred-trillion yuan question now burning up investors. And for an answer, look no further than the readily available monthly TSF report. The total social financing figure and its growth rate give a clear sense of which way the People’s Bank of China has its hand on the tiller, according to a top central bank counselor.

TSF – which is the aggregate financing to the real economy – will increasingly become a core tool for macroeconomic policymaking in China, Dr Sheng Song-cheng, adjunct professor of economics and finance at China Europe International Business School, told financial news outlet Yicai.

His comments followed the latest release of broad money supply. The downward-sloping trajectory of M2 has fueled speculation among some market watchers that the PBOC’s deleveraging campaign in the financial sector will ultimately hit the underlying economy.

In 2011, Sheng led the team tasked with defining and compiling TSF, which has been adopted by the government’s annual Central Economic Work Conference and the subsequent Government Work Report for five consecutive years, according to his profile on the CEIBS website.

“TSF and M2 are two sides of the same coin, and in theory they compliment each other, but as off-balance sheet financing channels continue to expand as they already have, the impact on broad money supply is becoming unclear. Therefore, there appear to be some distortions to M2,” the PBOC counselor said.

The year-on-year growth rate for TSF in March and April was 12.5% and 12.8%, but M2 only expanded 10.6% and 10.5% in those months.

In early March, Premier Li Keqiang announced at the National People’s Congress that the 2017 M2 and TSF targets would both be set at 12%, down from 13% in the previous year.

“If there were no distortions for M2, then it suggests the current monetary policy stance is already on the tightening end, so then why does the central bank keep emphasizing a ‘prudent and neutral’ posture?” Sheng asked.

Amid deleveraging and the existing monetary policy stance, “raising money market interest rates would squeeze out financial asset bubbles, but if the benchmark lending rate is hiked then it will directly impact the real economy, hence the former remains the focal point of the current central bank objective,” he added. “It’s a trial and error process” for the PBOC.

Trial and error it may be, but the squeeze on new debt sales from higher bond yields is definitely real. A breakdown of the components that make up the TSF growth rate shows that bonds have been stalling. Springing up to fill the gap are those shadowy alternatives, trust loans and UBAs – undiscounted bankers’ acceptances, a short-term debt instrument issued by a company and backed by a commercial lender.

Read: Shadow banking in China: A primer by The Brookings Institution

Trust loans: Loans and leases made by trust companies. Trust companies are financial firms in China that have a quite flexible charter and combine elements of banks and asset managers.

Entrusted loans: These are loans made on behalf of large corporations, using banks or finance companies as intermediaries. They are most commonly to other companies in the same group or to suppliers or customers. There is also an interbank version, where one bank will act on behalf of another.

Bankers’ acceptances: These are notes issued by banks that promise to pay a fixed amount a few months in the future. Generally these are supposed to be issued in connection with a non-financial transaction, such as a purchase of goods, but reports suggest they are often used more loosely.