China's total social financing the lowest since April 2012 at CNY1.04t

Bond issuance fell to just CNY44bn in June.

According to Barclays, total social financing came in weaker than expected at CNY1.04trn (Barclays: CNY1.2trn; consensus: CNY1.275trn), the lowest since April 2012.

Here's more from Barclays:

This reflects the tightening impact from the recent liquidity squeeze and the strengthened regulatory tightening of off-balance sheet activities. In particular, bond issuance fell to just CNY44bn in June, compared to an average of CNY235bn in Jan-May.

Total off-balance sheet lending (including entrusted loans, trust loans and bankers’ acceptances) amounted to just CNY45.8bn in June, compared to an average of CNY562bn in Jan-May.

It should be noted though, that the decline largely came from an unwinding of bankers’ acceptances, while entrusted loans and trust loans continued to grow at a robust pace. The guidelines highlighted the need to reduce the financial risks so we expect modest growth in shadow bank lending in H2.

Policy bias towards tighter liquidity in H2, compared to H1. Money supply growth fell to 14% y/y in June, from 15.8% previously (Barclays and consensus forecast: 15.2%).

The sharp drop was in part because of a high base, as savings deposits rose sharply in June 2012. But we think it also reflects PBoC’s policy bias for tighter liquidity from here on compared to earlier in the year – we note that the 2013 target for M2 growth is 13% (H1: 15.5%).

We hold similar views to the central bank, that the economy is not short of liquidity but needs a more efficient allocation of credit to the real economy and productive sectors as opposed to circulating within the financial system for regulatory arbitrage.

As such, our long held view is that RRR cuts are neither desired by the PBoC, nor justified by economic conditions. The PBoC deputy governor commented on 11 June that a high RRR provides the financial system a buffer in the event of a crisis.

More efficient credit allocation needed. New loans in June were slightly higher than expected, at CNY860bn (Barclays and consensus: CNY800bn). This brought the total amount of bank lending in H1 to CNY5.07trn – implying a full-year implicit target of CNY8.5trn, assuming the 3:3:2:2 quarterly lending pace as per historical norms (2012: CNY8.2trn).

In June, new loans to corporates increased markedly compared to April and May, with the majority of the loans being short-term in tenure. The sharp spike in interbank interest rates and financial market volatility in June affected short-term market funding, and resulted in more traditional bank lending.

New loans to households – which include mortgage loans and lending to SMEs – remained elevated in June. They have amounted to CNY2.07trn in H1 this year, compared to CNY2.52trn for the whole of 2012.

The state council released 10 guidelines on how monetary and financial policy can stabilise growth and reduce economic and financial risks on 5 July.

The guidelines said that misallocation of capital is hampering economic restructuring, and called for more credit support for upgrading, consumption and urbanisation infrastructure, among other key priority growth areas.