The headline Chinese activity data like GDP and industrial production were weaker than expected in Q4 and December. Perhaps more importantly (but not as widely reported) is the weakening in credit growth and the tightening of financial conditions, which suggests all investors should be cautious about Chinese growth in Q1.
Total social finance, which is the People's Bank of China's widest measure of credit availability, was weak in December, falling ~24%YoY. For the year as a whole, total social finance is up 10%YoY, although there is a clear drop in credit availability post the SHIBOR squeeze seen mid-2013. Total financing was down 18%YoY in Q4.
A big target of policy markets this year has been "shadow" financing through the use of wealth management trusts. Growth in these products is up a very strong 71% for the year, although growth in these products was down 3%YoY in the last 4 months of the year.
Other areas which had seen very strong growth in 2012 also pulled back sharply, with undiscounted bankers acceptances, a type of short term financing, falling 26%YoY.
Tighter credit conditions has created collateral damage beyond the concerning parts of shadow financing. Net corporate bond issuance, for example, was down a very hefty 20% over the year.
Interest rates continued to tighten over December, with the yield curve in SHIBOR markets steeping since the start of January. While overnight rates have fallen, as the PBC tries to calm markets, the spread to 1 week rates have widened.
This is a different scenario to mid-2013 when overnight markets froze. While that was potentially much more damaging, the recent rise in interest rates will still be corrosive to activity in the coming months. For that reason its worth being cautious on the Chinese macro picture and commodities.
