HSBC with the note:
The slowdown in the growth of total social financing (TAF), mainly due to a higher base last year, has probably led to a tightening of monetary conditions; but the loan structure is improving with medium and long-term loans still strong to support the real economy. We expect outstanding RMB loans to remain stable at 12.3% year-on-year in May. Although tighter regulations in the real estate market continue to dampen household demand for credit, business demand, particularly for medium and long-term loans, has likely remained robust thanks to the improving business climate and the continued recovery in domestic and global demand. Total social finance growth is expected to slow to 11.1% in May, from 11.7% year-on-year in April, mostly on an increasing basis last year (TSF growth fell from 12.0% in April at 12.5% in May 2020). In addition to a slowdown in loan growth compared to the same period last year, bond issuance has also declined. According to Wind, as of May 27, net corporate bond issuance was negative by RMB 205 billion, while government bond issuance increased by RMB 779 billion, significantly lower than in May 2020 (288 billion RMB and 1136 billion RMB respectively). The HSBC MCI index likely showed a significant tightening in May mainly due to a slowdown in TSF growth as well as a more rapid rise in inflation indices which contributed to a larger decline in the growth of the real credit (Chart 1). The exchange rate appreciated slightly, which also contributed to a larger drag on the MCI in May.
That said, real rates were lower as the nominal rate, the DR007, fell slightly and inflation accelerated, which helped partially offset the slowdown in TSF growth. Year-to-date capital investment (FAI) growth is expected to slow to around 17.5% in May (from 19.9% in April), with two-year CAGR reaching 4.9% in May (against 3.9% in April). ). The recovery is expected to come mainly from manufacturing and infrastructure, with real estate investment expected to slow down a bit. Manufacturing investment is expected to continue a steady recovery, with monthly year-on-year growth accelerating to around 5.2% in May (from 3.4% in April), supported by the rapid recovery in profits and utilization rates high capacities. The government’s focus on the manufacturing sector and industrial modernization should support a more sustainable manufacturing investment recovery cycle. Investments in infrastructure, moreover, have probably also accelerated. Government bond issuance soared to RMB 778.5 billion this month (as of May 27), after remaining low for the first four months, which should offer more support for investment in short-term infrastructure. Real estate investment, on the other hand, is expected to gradually run out of steam. Land investment, which picked up in April, is likely to slow, as growth in land supply has been trending down since 2H20. Tightening macroprudential rules will also reduce home purchases, which will reduce investment in construction and installation. According to Wind, the mortgage rate for first-time purchases in Guangzhou fell from 4.90% in January to 5.35% in May, while in Shenzhen it fell from 4.98% in April to 5.03% in May. In fact, monetary data for April already indicated a slowdown in demand for home purchase loans. We expect real estate investment to gradually slow down under a more stringent real estate policy.
Better and worse news out there. Local government borrowing increased in May, falling only 31% compared to -80% in the first four months. As I mentioned before, there is a lot of wiggle room in local government quotas to lift borrowing from these collapsed levels.
That said, it is still sharply declining, so the air pocket of Chinese infrastructure is still expanding.
This less auspicious news is that I expect the property’s development to continue as well. Especially directly targeting the balance sheets of major developers.
If HSBC is right about TSF for May, and we take such estimates with a grain of salt, then China’s credit momentum will be hammered again.
Nothing here makes me change my bearish outlook for Iron Ore.