A Bearish Explanation For Chinese Loan Growth

January's rapid loan growth has brought about some bearish sentiment relating mainly to home prices and concerns about leveraging and bad debt. There's a bearish argument that goes back one step to the loan growth itself. Chinese banks stuffed their books full of loans in January because they're all rushing to fill their quotas with good credit. Here's Jeffrey Snider of Alhambra: A Slowdown That Won’t Stop Slowing Down

Not only are credit channels narrowing (conspicuously only toward those conduits where profits and sustainability matter least) I believe what I proposed of TSF and rapid loan growth in January is being confirmed. It wasn’t so much a burst of loans indicating the start of renewal as rather a potentially disastrous preview about what Chinese banks were thinking about the near term – get loan quotas met, stuffing as many months forward, while they still could.

Thus, the fundamental landscape of the Chinese economy isn’t one where industry is being supplanted by services and the consumer, it is likely instead as I suggested yesterday with Brazil and even US manufacturing – a slowdown that just doesn’t stop slowing down. We have never seen anything like this before and it is a global phenomenon. The trajectory is startlingly clear yet because it isn’t the typical, historical recession “V” every little upward variation can be suggested as its end and the start of the recovery; only to find usually a month or two later still more slowing on the same curiously shallow slope.

He sees the contracting eurodollar market as the backdrop:

I’m open to any number of interpretations as to cause, especially the surplus of debt the past few decades, but I believe even that is a symptom tracing back to the eurodollar system and its relentless decay. I think more than any other explanation, eurodollar banks consistently withdrawing their financial resources from a financialized global economy would produce something similar in the real economy – a slowdown that just doesn’t stop slowing down no matter what “stimulus.”

He also discussed TSF here: China Bank Activity And Total Social Financing May Not Suggest Anything Good At All, speculating that some of the rise in bank loans may represent contracting in WMPs.

If Snider is correct, the problems in the global economy go to the core of the global monetary system. China is more a symptom than a cause, exposed by its growth model and prior credit bubble, but unable to control the key factor.