Monetary easing in China starting to work: HSBC

Money supply growth is on the rebound and further easing measures are still in the pipeline.

Qu Hongbin, Co-Head of Asian Economics Research at HSBC, reported:

China's December new loan and broad money supply growth both beat market expectations, confirming that Beijing's earlier easing measures are starting to work. Monetary growth may have bottomed, heralding at least a stabilization of economic growth.

The easing of inflation pressures allows further monetary easing to support growth. We still expect at least 150bp reserve ratio cuts in 1H 2012, which should help to create around RMB8-8.5trn of new loans this year. All these, plus fiscal measures, should secure a soft-landing.

Facts
China's new loans jumped to RMB640.5bn in December from RMB562.2bn in November, beating our above consensus expectation (HSBC: RMB600bn, Bloomberg; RMB565bn). The new loans for 2011 finally reached RMB7.47trn, in line with PBoC's target of RMB7-7.5trn.

Outstanding loan growth hence picked up to 15.8% y-o-y in December from 15.6% y-o-y in November. Seasonally adjusted m-o-m growth rose to 1.9% y-o-y in December from 1.6% in November, by our estimation.

The breakdown suggests that the rebound was mainly driven by a surge of short-term new loans to corporations, which rose to RMB359bn in December from RMB284bn in November, its highest level in 2011. Mid-and-long-term new loans to corporations fell to RMB73bn in December from RMB81bn in November.

New loans to households jumped to a three month high at RMB160.5bn in December (vs. RMB143bn in November), despite the deceleration of mid-and-long-term consumer loans (mostly mortgage loans) due to cooling property market activity.

Broad money (M2) growth rebound meaningfully to a four-month high at 13.6% y-o-y, notably higher than 12.7% y-o-y in November and a consensus forecast of 12.6% y-o-y, partly reflecting a stronger pace of deposits growth (13.5% y-o-y in Dec vs. 13.1% y-o-y in Nov) triggered by a typical year-end acceleration of fiscal disbursement and banks' efforts to attract deposits in a bid to meet year-end target.

Seasonally adjusted, we estimate that M2 growth rose to 2% m-o-m in December from 1.4% m-o-m in November.

M1 growth picked up slightly to 7.9% y-o-y in December from 7.8% y-o-y in November. But the seasonally adjusted sequential growth of M1 dropped to 0.5% m-o-m in December from 1% in November, by our estimation.

Implications
The stronger than expected new loan and M2 growth data indicates that earlier easing measures, notably the first reserve ratio cut that came into effect 5 December has started working. Despite subdued lending to property market, a significant jump in new lending to corporations helped to boost lending and M2 growth, which are critical for supporting growth and jobs.

Monetary growth may have bottomed, suggesting economic growth is set to recovery in the coming months. The meaningful rebound of M2 growth is in line with our expectation and heralds a stabilization (if not a meaningful rebound) of GDP growth in the coming months, given the tight correlation between M2 and GDP growth.

Meanwhile, as easing measures filter through, M1 is likely to see further rebound, though the current pace of growth suggests still weak growth momentum.

The easing trend of inflation (despite a pending temporary spike around Chinese New Year) allows further easing measures. Moreover, China's top leaders have indicated further policy easing to support the growth of real economy.

We still expect at least another 150bp reserve ratio cuts in 1H 2012. This should help to translate into a higher M2 growth ratio in the coming months and RMB8-8.5trn new loans for 2012. All these, plus tax cuts and fiscal spending should warrant a soft lending. Our expectation for 8.6% y-o-y GDP growth for 2012 remains intact.

Bottom line: Monetary easing is starting to work, helping to stabilize growth. But further easing measures are still in the pipeline. We expect the next reserve ratio cut to come within weeks.