Chinese equities markets were down as worries over the credit crunch in China continue to weigh on regional sentiment. Despite the second consecutive session of lower lending rates (7-day repo was down 230bps below 7%) and PBOC commentary reassuring investors (PBOC will implement “Fine-Tuning” policy in the short term), Shanghai Composite was down nearly 5% and Hong Kong off by 2.0%, lowest levels since December and Sept of 2012 respectively. even though short-term lending rates are moving lower, they are still well above the levels seen just a few weeks ago and, moreover, the damage on the speculative property sector would be lasting. Even if short-term lending rates were moving lower, they are still well above the levels seen just a few weeks ago and that will penalize small banks according to Moody’s:
China’s worst cash squeeze in at least a decade may weigh on smaller banks’ financial strength as their reliance on interbank funding leads to an erosion of loan margins, according to Moody’s Investors Service. Mid-sized banks got 23 percent of their funding and capital from the interbank market at the end of last year, compared with 9 percent for the largest state-owned banks, Moody’s said in an e-mailed statement today. Those banks will probably compete “more aggressively” for deposits amid the credit crunch, which would increase cost of funds, it said.
Goldman Sachs became the latest bank to downgrade China’s economic growth on Monday, saying tighter financial conditions and reforms are downside risks for the world’s second largest economy. The bank cut China’s gross domestic product (GDP) growth forecast for the second quarter to 7.5 percent on the year from 7.8 percent previously. It also revised full-year growth estimates to 7.4 percent for 2013 and 7.7 percent for 2014, from 7.8 percent and 8.4 percent, respectively. The official growth target for the year is 7.5%.
China’s growth rate next year will probably drop to 7.3 percent, according to a report released by the China International Capital Corp Ltd on Monday. The government will likely cut growth targets for 2014 to 7 percent, compared with this year’s 7.5 percent, it said. CCIC hiked its forecast of M2 growth, a broad measure of money supply, to 14 percent for this year, but said the pace would moderate to 13 percent in 2014. And new yuan loans extended by commercial lenders next year will stand at 9.9 trillion yuan ($1.61 trilion), it added. The company maintained its GDP growth forecast for 2013 at 7.7 percent, while it cut the inflation rate forecast to 2.6 percent.
Finally, Chinese Beige Book confirmed the growth slowdown in Q2:
The latest China Beige Book showed fewer retailers reporting revenue growth along with a “sharp” pullback in service industries. An increased number of retailers said at least 60 percent of sales were to consumers.
Capital spending rose in transportation and was unchanged in manufacturing while weakening in retail, services, real estate and mining, according to the report. The property market cooled, while the labor market was “stable,” China Beige Book said.
Interest rates on loans averaged 7.10 percent, up 34 basis points from the previous quarter, while bond yields of 7.11 percent were up 80 basis points, the report said.