Deleveraging Has Finally Begun In China

Chinese credit growth slowed in October. New loans fell to 506 billion yuan, down from 787 billion yuan in September. Outstanding loans climbed 14.2%, down from 14.3%.

M2, a broad measure of money supply climbed to 14.3% on the year, compared with 14.2% the previous month.

And total social financing (TSF) slowed to 856.4 billion yuan, 1.40 trillion the previous month. This was in part because of slower new bank loans in October which fell to 506.1 billion yuan.

"Shadow banking deleveraging remained the case, as new trust loans shrank to a 15-month low of CNY 40bn and outstanding bankers' acceptances contracted CNY 39.8bn mom - the sixth monthly contraction in the past seven months," wrote Societe Generale's Wei Yao.

Based on all of this Yao expects that total credit growth slowed to a 13-month low of 19.2%, down from 20% in September.

Yao has previously said that policymakers are aware of China's debt problem and are trying to "engineer a gradual deleveraging process."

And it is finally registering in official statements.

In its Q3 2013 monetary policy report, the People's Bank of China, emphasized the deleveraging process. "One major change in the statement is that it sees the economy in a prolonged process of deleveraging and capacity reduction," said Dong Tao of Credit Suisse.

"The central bank described that the old growth model, which was driven by export and local government investment, should be revamped, but a new growth engine has not been established," added Tao. "This is the first public confirmation that the monetary policy may become tightening biased, though the official stance remains neutral."

October's credit data seems to support this idea, and is a negative for near-term growth.