We May Have Seen The Peak Of Easy Credit Conditions In China

This was above expectations for an increase of 900 billion yuan.

Total social financing (TSF) which includes trust loans, entrusted loans, FX loans, bankers’ acceptance bills, corporate bonds, and non-financial stock sales – surged to 2.54 trillion yuan in March. This was up from 1.07 trillion yuan the previous month.

M2, the broad measure of money supply, beat expectations, rising 15.7 percent. Meanwhile, Chinese FX reserves rose by $130 billion to $3.44 trillion in Q1. The impact of disguised Forex inflows as exports isn't clear.

We have previously reported that to truly understand China's monetary stance investors should watch seven-day repo rates, revised TSF growth, and loan growth.

The rise in new loans and TSF is cause of concern because Chinese policymakers are closely watching the property market and shadow banking and are trying to crack down on both.

Fitch recently downgraded China's local currency sovereign rating. It warned that "risks over China's financial stability have grown. Credit has grown significantly faster than GDP since 2009. China experienced the second-fastest expansion of credit in real terms."

Fitch also warned that total credit, including shadow banking could have reached 198 percent of GDP.

"We expect the various tightening measures (housing & shadow banking) to bite from here onwards," Societe Generale's Klaaus Baader wrote in a note to clients. "March may mark the peak of easy credit conditions. Nevertheless, the current monetary environment should be able to support a further growth pick-up in Q2."

The Chinese central bank is however expected to maintain a "neutral stance" this year.

Here's a look at China's money supply and bank loan growth since 2002: