China cash squeeze seen creating Vietnam-size credit hole

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Pedestrians walk past commercial buildings in the Lujiazui district of Shanghai. Gross domestic product may have expanded 7.5 percent in the April-June period, according to the median estimate of 26 analysts surveyed by Bloomberg ahead of a July 15 release by the statistics bureau.

China's money-market cash squeeze is likely to reduce credit growth this year by 750 billion yuan ($122 billion), an amount equivalent to the size of Vietnam's economy, according to a Bloomberg News survey.

The number is the median estimate of 15 analysts, whose projections last week ranged from cuts of 20 billion yuan to 3 trillion yuan. The majority of respondents also said they approve of the government's handling of the credit crunch and said the episode reinforces their expectations for policy reforms such as loosening controls on interest rates.

June credit data due as soon as this week will give investors clues to how much the cash squeeze, which sent interbank borrowing costs soaring to records last month, is affecting the world's second-biggest economy. Whether a slowdown extends into the second half may hinge on how effectively Premier Li Keqiang can redirect funding after his clampdown on speculation.

"The liquidity crunch has increased downside risks," said Louis Kuijs, chief China economist at Royal Bank of Scotland Group Plc in Hong Kong, who estimates it will reduce aggregate credit by 1.8 trillion yuan this year. "As long as policy makers cushion the impact through fiscal and exchange-rate measures, the damage to the economy could be quite modest."

The People's Bank of China will release June figures on new yuan loans, money supply and a broader measure of credit known as aggregate financing by July 15. Data on inflation are due tomorrow from the National Bureau of Statistics and trade numbers will be given July 10 by the General Administration of Customs.

GDP estimate

Gross domestic product may have expanded 7.5 percent in the April-June period from a year earlier, according to the median estimate of 31 analysts surveyed by Bloomberg ahead of a July 15 release by the statistics bureau. The agency will also publish figures on industrial production and retail sales for June and fixed-asset investment for the first half of the year.

Citigroup Inc. cut its 2013 growth forecast to 7.4 percent today from 7.6 percent, citing low odds of government stimulus, a slowdown in credit expansion and "less accommodative" lending conditions coming in the second half.

Elsewhere in Asia today, Japan's current account surplus widened 58 percent in May from a year earlier to 540.7 billion yen ($5.3 billion), according to a Ministry of Finance report released inTokyo. Increases in exports and income from overseas investments contributed to the gain, adding to signs the nation may avoid sliding into a persistent deficit.

German industry

In Europe, Germany reports May figures on industrial production and trade. Production may have declined 0.5 percent in May from the previous month, the first drop since January, based on the median estimate in a Bloomberg News economist survey.

The MSCI Asia Pacific Index of stocks fell 1.2 percent as of 1:20 p.m. in Tokyo.

China's State Council, headed by Li, pledged on July 5 to improve the effectiveness of financial support for the economy, saying a misallocation of capital is hampering the restructuring of the economy. It vowed to maintain a reasonable supply of money and credit and reiterated that it will follow a "prudent" monetary policy stance. Liquidity in the financial system is "sufficient," Vice Finance Minister Zhu Guangyao said at briefing in Beijing the same day.

June statistics

The effects of the cash crunch may be evident in June data from the PBOC. Estimates of eight analysts for aggregate financing, the government's broadest measure of new credit that includes bond sales, entrusted loans and bankers' acceptance bills, range from 1 trillion yuan to 1.6 trillion yuan, compared with 1.78 trillion yuan a year ago. New local-currency loans probably fell to 800 billion yuan, according to the median projection of 36 economists, from 919.8 billion yuan in June 2012.

Kuijs forecasts full-year aggregate financing of 20.3 trillion yuan, after last year's 15.8 trillion yuan.

Companies and local governments at the financial system's "margin" will find it more difficult and expensive to get credit, said Kuijs, previously a World Bank economist in Beijing. Local government investment projects and small companies "are going to be the hardest hit by a clampdown on financial activity," he said.

Yao Wei, China economist at Societe Generale SA in Hong Kong, projected the biggest impact on credit, cutting her estimate for the year to 19 trillion yuan from a pre-squeeze 22 trillion yuan.

Speculative lending

"Credit growth has been accelerating without much GDP, so it could also be the case that 3 trillion yuan may not mean much in terms of real growth if it's just cutting speculative lending," Yao said.

The cash squeeze has eased since interbank borrowing costs reached records on June 20, with China's money-market rate declining for a second week on speculation the PBOC injected funds into select banks. The seven-day repurchase rate dropped 236 basis points, or 2.36 percentage points, to 3.81 percent.

Asked for an opinion on how the government handled the June cash squeeze and money-market rate surge, nine of 17 analysts said they somewhat approved. Four said they somewhat disapproved, two strongly disapproved and two were neutral, according to the survey conducted from July 1 to July 4.

Eleven of 16 respondents to another question said the liquidity shock reinforces their expectations that China's new leadership will enact structural reforms in the next year or two including liberalizing interest rates, overhauling the residence-registration or "hukou" system and implementing a property tax. Five said they're still skeptical such developments are coming and none said the squeeze changed their mind.

Growth focus

"Although the country is talking about reform, reform, reform, I think at this point of time probably the country will still focus on growth," said Jimmy Zhu, an economist at brokerage FXPrimus Ltd. in Singapore. "The credit crunch should have a very short life." He estimates a 200 billion yuan cut in aggregate financing from the cash squeeze.

Inflation and trade indicators may show pickups for June. The consumer price index probably rose 2.5 percent from a year earlier, according to the median estimate of 40 economists surveyed by Bloomberg News, up from 2.1 percent in May.

Gains in exports may have accelerated to 3.7 percent from a year earlier last month after collapsing to 1 percent in May following a crackdown on fake invoices that inflated January-April data. Imports probably rose 6 percent from a year earlier, after a 0.3 percent drop in May.

Export data are "likely to be under continued pressures" as authorities try to stop over-reporting of figures, Goldman Sachs Group Inc. economists including Yu Song in Beijing said in a July 4 report. Gains in imports "will likely face separate pressures from weak domestic demand growth," they wrote.

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