China momentum shifts as policymakers hit credit accelerator

The Chinese activity were stronger than last month, with monetary indicators suggesting that a change of heart from policymakers has stopped the downtrend in growth for now.  While this positive in the short term, it seems unlikely that the pick up in growth will be persistent given the competing concerns of a managed slowdown in growth rates and rising credit risks.

All the headline data were better in June, with GDP growth at 7.5%YoY, fixed asset investment above 20%YoY and M2 growth also picking up.

The surge in total social finance was also notable.  Bank loans in particular were much stronger in June, withe it increasingly clear that policymakers have let go of the monetary reins as growth risks increased.

Its also notable that "shadow" financing also increased in the month to be above 2013 levels. This is a surprise given the level of risks surrounding these types of products, with investors seemingly unconcerned by defaults in some products earlier in the year.

Housing markets have been at the epicentre of concerns about the Chinese economy, with construction and sales activity still looking weak. That said, there does appear to have been a tentative stabilisation in funding to the sector, which will probably stave off a more serious collapse for now.

Despite weaker housing construction, steel production remains pretty good, with YoY growth picking up to 4.5% in June.  With trader inventories now very low, it doesn't look like production has been going too fast, despite the higher levels at mills.

It still seems likely that steel production growth will weaken given the recent trajectory of housing construction growth.  But the outlook it probably looks a bit better than feared and the lack of inventory accumulation should limit the downside.

This means commodities like iron ore are likely to be fairly steady in the $95/t-$100/t range even through the summer months. If the current rates of growth can be maintained for the next couple of months, then its worth being bullish for Q4.

Its interesting that pig iron production has been quite a bit weaker than crude steel output in the year to date.  Further more coke output is still in negative territory despite the more recent pick up.

With coke inventories not high, it seems likely that Chinese met coal demand should be quite a bit stronger as well in Q4 if recent trends persist.

For steam coal, inventories are still too high and demand currently too weak to be bullish, with spot prices falling further again more recently, with assessments at QHD for 5,500kcal coal now at RMB490/t.

The silver lining for steam coal is that it looks like the impulse from hydro generation is not going to be particularly strong, with generation up 4.4%YoY off low 2013 levels.

So it seems likely that post aggressive destocking and price declines in the next few months, prices could jump meaningfully higher, perhaps as winter stocking begins.

The overarching concern to this picture is how long the more recent pick up in activity will last. Policymakers haven't really achieved any meaningful change to the mix of growth, nor have they reduced its reliance on credit. The rapid pace of growth in many areas of financing continues to increase risk of a nasty fallout.

So it seems likely that policy will change tack again to tackle this problem, or there will be a much bigger crunch further down the road.  To me it seems likely that the stance of policy will shift into Q4, as slower growth targets are announced for 2015.