Chinese new bank lending surged to a record high in January, indicating that the government may be willing to tolerate a further increase in leverage in order to support short-term economic growth.
According to the People’s Bank of China (PBOC), new bank lending jumped to 2.51 trillion yuan in January, the largest monthly increase since records began in January 2004.
While lending by Chinese banks tends to be front-loaded each year, few were expecting an increase of this magnitude. Underlying this point, the figure easily exceeded the 1.8 trillion yuan increase that had been forecast by economists. It was also nearly five-times larger than the 597.8 billion increase registered previously in December.
As a result of the enormous borrowing spree, the total value of outstanding yuan loans increased by 15.3% from 12 months earlier.
M2 – or broad money – also exceeded forecasts, rising by 14.0% from January 2015. The figure beat the 13.3% growth registered in the 12 months to December and expectations for an acceleration to 13.4%.
Total social financing (TSF) – the broadest measure of liquidity that captures lending from non-traditional sources – also surged, jumping to 3.42 trillion yuan from 1.82 trillion yuan in December.
While risk assets across Asia have reacted positively to the news, presumably on the hope that the lending spree will help to spur on near-term economic growth, whether that sentiment can last remains debatable given concerns over the amount of leverage in use across China’s banking sector.
Famed US hedge fund manager Kyle Bass warned earlier this month that the day of reckoning for China’s banking system may be only “months away”.
Bass suggested too few investors were paying attention to signs of stress in China’s banking system, warning that after growing to US$34.5 trillion, or more than three times GDP in recent years, a wave of defaults may be about to hit the financial system.
“This isn’t an aberration. This isn’t a speed bump. This is China’s excess — let’s call it misallocation of capital — coming home to roost,” Bass suggested.
“You can’t grow your banking system 1,000% in 10 years and not have a loss cycle.”