PBoC's hidden peril of easing

The PBoC has not offered any headline easing measure since the RRR and interest rate cuts on 25 August, but banks are doing its bidding. 

Although (private sector) credit demand dropped to a historical low, bank loan growth, adjusted for the bond-for-debt swap programme, accelerated further to 16.3% yoy in September from 15.7% yoy in August and 14.5% yoy three months ago. 

Mostly due to that, credit growth quickened to 13.6% yoy in September from 12.1% yoy in June and broad money growth rose above 13% yoy over the quarter, despite limited recovery in base money growth.

Corporate bonds have become another important credit channel, maintaining above 20% yoy growth. Bond yields have fallen sharply and credit spreads compressed notably. The exodus of investment funds from the equity market has certainly helped, but leverage has also expanded quickly in bond investment. 

"In Q3, the volume of bond repos soared 13% qoq and 81.0% yoy to RMB 155.8trn, the highest quarterly volume ever. This is a new area of financial system risk to keep an eye on,  this is a set of data that calls for more policy easing", says Societe Generale.