New yuan loans
According to the People’s Bank of China, or the PBoC, new loans issued by Chinese banks rose to 985.5 billion yuan ($150 billion) in May from 555.6 billion yuan ($85.2 billion) in the previous month. Total social financing, or TSF, a broader measurement of credit in the economy, fell to 659.9 billion yuan in May from 751 billion yuan in April. The rise in new loans indicates that the central bank is stepping up to support the growth of the Chinese economy.
Broad M2 money supply rose 11.8% YoY (year-over-year) in May, but this was below the 12.8% rise at the end of April. M2 includes not only cash and checking deposits but also savings deposits, money market mutual funds, and other time deposits, which are less liquid but can be quickly converted into cash or checking deposits. The PBOC is aiming for annual M2 growth of around 13% in 2016, thus raising the hopes that the Chinese authorities are likely to increase easing measures in the foreseeable future.
China’s aggregate financing dropped
Aggregate financing is the broadest measure of credit growth in the economy. It measures liquidity by adding total funds provided by the financial system to nonfinancial sectors and households.
China’s aggregate financing dropped to 659.9 billion yuan ($115.2 billion) in May from 751.0 billion yuan ($115.2 billion) in April.
The road ahead
Rising loans and declining aggregate financing indicate that the PBoC is extending all its support to the Chinese economy. However, this increases the country’s debt, which is rising at an alarming rate.
Further, the government is trying to shift its focus from a manufacturing- and export-oriented economy to a service- and consumer-driven economy in order to achieve a 6.5% growth rate in 2017, down from 6.9% last year. However, massive government and corporate debt levels and the real estate glut are major risks to the economy’s foundation. The economy has shown some signs of steadying in recent months, but the recovery remains uneven.
Impact on funds
The rise or fall in new yuan loans doesn’t directly impact the overall performance of mutual funds or ETFs. However, it gives you an idea of the amount of money flowing into the economy.
You can invest in Chinese shares via mutual funds such as the Shelton Greater China Fund, the AllianzGI China Equity Fund Class A (ALQAX), and the Fidelity Advisor China Region Fund Class A (FHKAX) and ETFs such as the iShares China Large-Cap ETF (FXI) and the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR). You can also opt for ADRs (American depositary receipts) such as Alibaba Group Holding (BABA), Baidu (BIDU), and Youku Tudou (YOKU).
For more analysis on mutual funds, visit Market Realist’s Mutual Funds page.