China's Aggressive Tightening Policies Are Inspiring Businesses To Outflank The Regime

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China’s businesses are getting creative utilising other means of acquiring capital besides bank loans to circumvent the People’s Bank of China’s quantitative tightening programs, according to Societe Generale’s Wei Yao.Loan growth may be down, but company’s are finding financing through other means, like trust loans, corporate debt, and off shore lending from Hong Kong.

A few examples, from Yao:

  • Chinese corporations have borrowed $12.2 billion from non-Chinese investors in 2011, over 5 times more than the amount of capital raised during the same time period in 2010.
  • Hong Kong commercial bank loans outstanding to Chinese non-financial corporates doubled between January 2010 and January 2011.

And another market for off shore loans may be soon to open up, this time in Singapore.

Clearly China’s tightening strategy isn’t working.

From Wei Yao

However, looking back at the limited history of this data, we find an interesting pattern – during monetary policy tightening cycles, the share of bank lending retreats the most. In 2007, when the PBoC hiked the RRR nine times, that share declined by 18 percentage points. In 2010, the share dropped by 12.5 percentage points, while total financing increased further from the record level in 2009. So it seems that credit rationing and quantitative tools are losing their magic. And what is more unnerving for the PBoC is that the harder it tries, the faster it loses its grip.

The solution, according to Yao, is yuan appreciation. The PBoC is slowly increasing its value, and expectations are growing that their could be a one-off increase.

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