Plenty of money, but where to invest?
- Aug M2 growth yoy continued to accelerate, up 12.2% yoy, the highest sinceAug loan growth to corporates continues to outpace household.
- Aug bills mix is the highest since 2016, despite bill yields remaining low. We believe this continues to indicate bank risk aversion to lending.
- Rapidly rising corporate time deposit growth which is driving a higher time deposit mix suggests an unwillingness by corporates to invest, in our view.
- Retain sector Neutral. Top pick remains CMB, PAB & BOC.
Fastest M2 growth since Apr 2016
M2 growth continues to accelerate and was 12.2% in Aug 2022, which is the fastest growth since Apr 2016’s 12.8% (Fig 3). Aug corporate loan growth yoy (excluding bills) was 10.7% (Jul: 10.5%; Jun: 10.8%; May: 10%; Apr: 9.9%), with it continuing to outpace household loan growth yoy (Aug: 7.4%; Jul: 7.7%; Jun: 8.1%; May: 8.3%; Apr: 8.9%). (Fig 12). We estimate that mortgage growth continued to slow down to about 5% yoy in Aug 2022.
Heightened bank risk aversion to lending seems to continue
This is because Aug mix of bills within loans was 6%, the highest since 2009 (Fig 4). We believe that China banks see these bills as a way to meet their monthly loan quotas, and also see these bills as virtually risk-free in terms of credit risk. We think that heightened risk aversion is leading banks to increase their mix of bills, even though current short-to-medium-term bill yields are the lowest since Apr 2020 and are lower than any other time since 2011 (Fig 5). There also appears to be a very strong correlation between the bill mix and a proxy of bank views of credit cost expectations (correlation co-efficient of 75%), which is the yield differential between general corporate loans and bills (Fig 6).
Fast corporate time deposits growth: Corporates unwilling to invest
We are concerned that despite the acceleration of corporate loan growth yoy (Aug 2022: 12.8% vs. Dec 2021: 11.1%), a significant portion of the funds seems to be placed in corporate time deposits. Growth of corporate time deposits has accelerated to 14.1% yoy in Aug (Jul: 13.1%), which is markedly stronger than Dec 2021’s 8.6%. We think this signals that corporates are unwilling to invest the funds from their bank loans to grow their business and would rather place these funds in a time deposit. The current phase of rapid growth of corporate time deposits also occurred in early 2020 (Fig 1), which was a period of heightened economic uncertainty, in our view.
Top picks: CMB-H, PAB & BOC-H
We maintain a Neutral rating on China’s banking sector. We value the banks using a stress test adjusted GGM (See Fig 21). Upside/downside risks: better-/worse-than-expected economy and increase/decrease in policy risks.
