Forex Flash: Chinese credit boom could roil AUD – UBS

Credit growth in China, measured by total social financing, came in at a whopping CNY2.54 trillion during the final month of the year, a new record. Even taking seasonal effects into consideration (analyzing January data in China is often more art than science), the general consensus is that the figure is extraordinarily high. As much of Asia returns from the Lunar New Year holidays, investors will be dissecting the data and more importantly, try to figure out where the money went/will go in the coming months and whether this marks a beginning of a new credit boom.

According to Chief China Economist Tao Wang, “trade data in China already indicated strong imports of commodities. Iron ore (+11%y/y) and coal (+56%y/y) - Australia's key exports to China - were the key beneficiaries, and as the purchases already reflect expectations for a recovery in investment demand, there is no reason to suggest that the coming months will score even higher.”

In particular, Tao notes that imports for stockpiling purposes ahead of peak construction season (March-April) were a factor, so we could make the argument that any tailwinds from a new investment boom for China have already passed. Besides, even if demand for real estate in China were to surprise to the upside and led to further growth in credit demand, it might not be viewed as a good thing for a country desperately trying to rebalance away from investment growth as the key economic driver. “In addition, the implications for inflation are rather obvious, and if price pressures force China to tighten policy well ahead of expectations, it would not bode well for AUD at all.”