China: M1 recovery supports growth stabilisation – Standard Chartered

According to analysts at Standard Chartered, China’s M1 growth is an effective leading indicator of the underlying growth momentum and outlook for  real activity.

Key Quotes

“While M1 growth was closely correlated with housing sales revenue and loan growth before 2012 amid the typical property- and credit-driven economic cycles, our model shows that housing sales and off-balance-sheet lending have also had an evident impact on M1 growth in recent years, with local-government financing vehicles (LGFV) bond financing playing a role.”

“China’s crackdown on shadow banking and local government debt has sharply slowed M1 growth – to a record low of 0.4% in January 2019 from a high of 25.4% y/y in July 2016. However, as growth headwinds have intensified in 2019, the authorities have boosted counter-cyclical measures, resulting in a soft recovery in M1 growth in Q2-Q3 2019 from hitting a trough in Q1.”

“We estimate that M1 growth will increase modestly to mid-single digits in 2020 as the contraction in off-balance-sheet lending eases and local government bond financing improves. However, we do not expect a strong rebound, given the authorities’ determination to control leverage and contain the housing market.”

“M1 growth also has a 3-6 month leading effect on corporate credit demand and a 9-12 month leading effect on PPI and inventory growth. As such, the recent M1 growth trend will support a stabilisation in real activity in 2020, along with a mild pick-up in PPI and a soft start to restocking in H1-2020, in our view.”