May new TSF jumped year over year mainly due to stronger government bonds & bank loans
New RMB loans in May strong again, especially new corporate lending
Headline new bank loans recorded RMB 1.48 trillion (1.55 trillion under TSF), largely in line with our expectation (BBG 1.6trn, UBSe 1.5trn), 300bn higher than one year ago. Stronger new corporate loans (at 846bn, +324bn year on year) led the strength again, especially medium and long term (M&L) loans (at 531bn, +278bn year on year). Such strength is likely boosted by People's Bank of China's (PBC's) RMB 1.8 trillion special re-lending and re-discount facilities in February-April (followed by additional new re-lending of 400bn announced in early June to support small to mid-size enterprise [SME] credit loan), the government's explicit guidance to support SMEs & infrastructure, and continued release of credit demand. Household loans improved a bit to 704bn (+42bn year on year) thanks to increase in short-term loans, while M&L loans (mainly mortgages) largely stabilized at 466bn, the latter reflecting recent recovery in property sales.
More government bond issuance also helped push new TSF higher
TSF credit rose by RMB 3.19 trillion in May, largely in line with expectation and 1.48 trillion more than TSF increase in May 2019. The strength in new TSF was driven mainly by government bonds (at 1.14 trillion, +754bn year on year) and RMB loans, while corporate bonds and shadow credit also improved from one year ago, with the latter in mild expansion rather than decline. New LG bond issuance recorded 808bn (+608bn year on year) thanks to the front-loading of special LG bond issuance (totalling 2.29 trillion before the NPC, vs 2020 annual quota of 3.75 trillion), which should help provide more explicit funding support for infrastructure investment (UBSe: 10%year on year).
Credit growth and credit impulse continued to rebound strongly...
UBS adjusted TSF credit growth picked up by 0.5ppt to 12.7%year on year in May (headline official TSF growth also rose by 0.5% to 12.5%), while our credit impulse rebounded further by 1.1ppt to 5.5% of GDP. Our seasonally adjusted new credit flow measure soared further from 35% previously to 41% of GDP (on 3mma basis). Taking the first 5 months together, China's new banks loans totalled RMB 10.3 trillion (+2.3 trillion year on year) and new TSF recorded 17.4 trillion (+5.4 trillion year on year), already 61%/68% of new credit in full year 2019. Meanwhile, M2 growth stayed robust at 11.1%.
...while rates spiked in recent weeks
PBC's liquidity operation has been relatively restrained since May, and the 7-day repo rate (DR007) has risen and remained around 1.9-2.0% since mid-May, well above the previous level of 1.2-1.5%. The absence of further liquidity easing measures and the PBC's recent choice of on-lending facility (instead of broader RRR cut or MLF injection) for credit support further cooled market expectation of monetary easing. The correction in market expectations, together with the continued improvement in economic data and increasing rates bond supply (mainly local government bonds), pushed CGB yields higher in the past month, with the 10-year CGB yield rising to above 2.8%, and the curve flattened.
Monetary policy to remain accommodative, credit growth to rebound further...
Given the policy targets outlined in the NPC meeting, we continue to expect further monetary and credit easing in 2020. We expect TSF credit growth to climb further to 13.8% by year end, helped by more liquidity offering and easier lending standards. We maintain our call for an additional 50 bps RRR cut and up to 20 bps in MLF policy rate cut this year, though the probability of RRR cut may have declined somewhat in light of PBC's apparent preference for using targeted re-lending facility.