Low inflation allows China to spur credit creation. It increasingly looks like a consumer credit boom, suggesting an upside potential for global liquidity and crypto prices.
China Credit Boom
A new credit boom seemingly starts in China. In January new loans were at the highest ever and M2 money supply growth in YoY terms recorded the fastest since April 2016.
China CNY Monthly New Loans and M2 Money Supply YoY Growth
There are anecdotal signs of broad credit easing, particularly for consumers. Last week Bloomberg published an article about a consumer credit boom in China (available at Bloomberg.com, but may be gated). The article is titled “Xi's Consumer Boom Thwarted by Secret Trades, Debt Misuse” and is focused on consumers’ misusing of cheap loans as an obstacle to economic recovery. However, I regard the article as rather opposite to its title, as it shows consumers are awash with credit. That will likely contribute to economic growth sooner or later and, more importantly, for investors, may fuel bubbles in asset prices. “As banks flood the market with a variety of lending products after pressure from Beijing for them to pump up the world’s second-largest economy with cheap loans, some borrowers are taking advantage of the low-interest rates to prepay mortgages or invest in stocks instead of buying goods.” – Bloomberg reports.
The article contains several examples of very cheap and easy-to-get consumer loans, and these examples look typical. There is the story that “Frank, a 29-year-old tech worker, just took out a 300,000 yuan consumer loan so he can double down on his A-share investment” (A-shares refer to the local stock market of China). 300,000 yuan is about $44,000, and the interest rate is likely below 4%. Getting the loan has been very easy, to say the least. “To qualify, he just submitted a form of basic personal information on his bank’s mobile app and paid a visit to a physical counter for an identity check. Hours later he was notified with a text message that he’d been cleared for the loans, with the money arriving in his account a few minutes later.”
Why Is It Possible?
The US Federal Reserve and most other central banks in the world aggressively tighten a monetary policy in order to slow inflation, restraining credit creation. It may seem strange, but China is completely out of sync with a global economic and monetary policy cycle.
Contrary to most other countries, China is able to loosen its monetary policy in order to support the economy and speed up credit creation because of well-contained inflation. Zero-Covid policy and quarantines have suppressed both economic growth and inflation, which hovers near 2% and is currently much below that in the US and most other countries.
China CPI (YoY, %)
The exchange rate of the yuan is near a 5-year average level, allowing to increase in the money supply without threatening the stability of the exchange rate. High rates in the US should be a limiting factor for any monetary policy loosening in China, but that does not seem like an immediate problem. The US dollar declined against major currencies since an early November high, creating room for lower rates in emerging market countries, including China.
Chinese Yuan at the Offshore Market (USD/CNH)
Effect on the Markets
Some assets most leveraged to Chinese consumers have already outperformed the market by a large margin. Shares of Moet Hennessy Louis Vuitton SE, the world’s largest luxury maker, defies a market correction and recently renews an all-time high in USD terms (the original trading currency is the euro because its primary stock exchange is Euronext Paris). The success of Moet Hennessy Louis Vuitton is usually credited to Chinese consumers, who are a primary growth factor of the company.
The Stock Price of Moet Hennessy Louis Vuitton SE (USD)
Hang Seng China Enterprises Index looks poised to break the 2-year-long downtrend which started in February 2021. The index represents Chinese companies traded in Hong Kong and is generally viewed as a better indicator than the local Chinese stock market influenced by capital controls.
Hang Seng China Enterprises Index (HKD)
Many bulge-bracket investment banks consider Chinese stocks as an asset of choice now thanks to an expected economic recovery and a cheap valuation. For example, this Monday Goldman Sachs said that it expects 24% growth of Chinese stocks by the year-end, pointing out better prospects of a consumer economy. “The growth impulse should be heavily tilted towards the consumer economy, where the services sector is still operating significantly below the 2019 pre-pandemic levels,” – Bloomberg cited the research note of Goldman Sachs.
Will Crypto Repeat a Boom?
The crypto boom of 2021 was largely driven by Western retail investors. Consumers were awash by pandemic savings and easily invested in high-risk assets, including crypto. In China, pandemic savings are lower because of no government help during lockdowns, but consumer credit is way easier. Moreover, the Chinese generally have a much higher savings rate compared with American or Europeans.
I believe that Chinese consumers can repeat a crypto boom, although arguably to a lower extent than in 2021. The Chinese economy is smaller than the US or EU, and a monetary tightening in most major countries should limit a global liquidity increase triggered by China's credit creation.
Longer term, there are obvious limits to China's monetary policy divergence from the US and other major countries (mostly a capital outflow and the exchange rate risk). In my view, China is a trend for a few months or maybe a few quarters, but not for years.
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