2012-05-25

Chinese banks see drop in demand; why are FX deposits up in China?; the copper carry trade

One news story and one analysis today.

China Banks May Miss Loan Target For 2012, Officials Say
This month may be worse. The four biggest banks -- which account for about 40 percent of lending -- had advanced only 34 billion yuan as of May 20, Liu Yuhui, a director at the government-backed Chinese Academy of Social Sciences, said in an interview this week, without saying where he got the data. The lenders may rush to boost credit in the last few days, mainly through short-term notes, he said.

China hasn’t officially announced the quotas set for each bank or the total loan target for 2012.

Still, as recently as last month, policy makers were indicating the target was 7.5 trillion yuan to 8 trillion yuan. Lenders in China’s eastern province of Zhejiang, for instance, will aim to increase new loans to about 670 billion yuan, accounting for 8.4 to 8.9 percent of the nation’s total increase, the government-backed Securities Times newspaper reported on April 26, citing Liu Renwu, head of the PBOC’s Hangzhou branch.

Failing to meet the annual loan target would mark a turning point for Chinese banks, which have reached or exceeded the central bank’s goal every year that such quotas have been in place since at least 2006.
Inflationists of the world, wake up! Even the Chinese government has met the force of the market. If people do not want to borrow, monetary systems that rely on credit creation (almost all of them today) cannot increase money supply. The Chinese public still have inflation expectations though, so if the government wants to make a bold move and reignite the housing bubble, the public will likely borrow and load up on homes and gold bars. And toilet paper and garlic, and any other commodity that can be purchased in bulk.

The next article is from the graduate student econ and finance blog at Beida (Peking University):
Why FX deposits surge in China
China’s monetary statistics for April 2012 showed weakness in both loan and deposit growth. In particular, Renminbi deposits fell by 465.6bn yuan, compared to a 342.4bn increase in April 2011. However, bank deposits denominated in foreign currencies (FX deposits) in China have been surging since the beginning of this year. FX deposits increased by 32.5% in the first 4 months of 2012, compared with 6% growth in the first 4 months of 2011. Every month there is about 20bn USD added into the banks’ deposit accounts.
From the news above, we know that those loans are even weaker in May. One factor for the growth in dollar deposits is coming from a decline in dollar borrowing:
Also, dollar loan growth has been faster than dollar deposit growth since 2005 and the amount of dollar loans was twice as much as the amount of dollar deposits by the end of 2011. However, the trend started to reverse in the fourth quarter of 2011 and continued to accelerate this year, when the new dollar deposits were larger than new dollar loans and the FX loan-to-deposit ratio has declined from 200% to 154%.
Here's your commodity strength in a nutshell:
The strict lending quota (compared with 2009) made it very difficult for some companies to borrow from banks. To get around the quota, the demand for letter of credits increased rapidly as it is not counted in the lending quota, though it has the function of short-term financing. Some companies imported lots of coppers in order to get the letter of credits, despite their business having nothing to do with copper. What’s more, some banks even cut the interest rate for letter of credits to attract more clients.
The Chinese used the U.S. dollar for a carry trade to buy oil into 2008, but since 2009 they've been stockpiling copper.

This blog also broke the story of the renminbi rising during interday trading as the PBOC moved the midpoint higher, while it fell interday during trading. An earlier post this week, PBoC against the market on USDCNY, shows that the yuan continues to plunge intraday.

Below is a Chinese news story on the copper pileup in Shanghai; it's the first increase at the ports in several years.

Link if video doesn't play: 铜需求下滑 折射国内经济增速放缓 东方新闻 120524

Below is the chart of the intraday yuan trade:
Here is copper over the past three years:

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