It is easy to attribute the relative calm in the Yuan to China’s huge credit stimulus in the early months of 2016 and the subsequent stabilisation in commodity prices. Critics argue that a looser policy only defers necessary structural reforms, while increasing leverage in an already over-extended financial system. Indeed, the 70-city composite for China’s house price index accelerated to 7.3% y/y in August. In reality, the Chinese Government is stepping up its efforts to tackle overcapacity in traditional sectors. PetroChina and Sinpec both reported declines in oil output during the first half of this year.
Over the first eight months of this year, the industrial production figures for August showed a 0.1% y/y drop in extraction of petroleum & natural gas compared with the same period in 2015. Mining & washing of coal decreased 1.8% on a similar basis. The sharp rise in coal prices over the past month is due to higher Chinese demand, but also earlier efforts to rationalise supply. Overall PPI deflation eased to -0.8% y/y in August: producer prices are falling at their slowest pace April 2012.
Summary:
- Bank loans are rising quickly, but shadow banking still relatively small compared to other advanced economies
- Government efforts to curb shadow banking welcome
- Increased leverage must be seen in context: technology still driving China’s economic transition
