2023 to be the year of re-leveraging in China

New yuan loan increased CNY1400 billion, more than the consensus expectation of CNY1200 bn, in December. This increase is special as banks usually defer loan growth in the last month of the year to the first month of the next year.

The increase was mainly in the medium to long-term corporate loans, at CNY1209 bn, higher than CNY737 bn in the previous month. This echoes the government policy to increase financing channels for real estate developers. Mortgages did not record an obvious increase in the month.

Almost all the rest of the loan and credit data are not eye-catching. The exception is that government bonds, including local government bonds, continued to increase while corporate bonds recorded a fall in net issuance.

Government bond net issuance increased CNY278 bn while corporate bond net issuance decreased CNY270 bn. This contrast highlights that the government kept getting funding for fiscal spending in the last month of the year.

In 2022, government bond net issuance increased CNY7.12 trillion while corporate bond net issuance increased only by CNY2 tn. This difference highlights the bad economic environment and deleveraging reform in 2022.

We expect this is going to change in 2023. Corporate bond issuance should climb when the economic environment improves. This does not squeeze out government bond issuance as local governments would need funding for continual construction of uncompleted home projects and infrastrastructure investments.

Loan growth could be strong in 2023 if the government relaxes "the three red lines" financial leverage indicators for real estate developers.

In short 2023 will be a year of re-leveraging.