The December broad money and credit data have surprised to the upside. M2 growth rebounded sharply to 13.6% y/y (BarCap: 12.3%, Bloomberg: 12.6%) after declining for five consecutive months (November: 12.7%). A record-high fiscal transfer (CNY1.23trn) and more deposits returning to the banks at year-end have injected liquidity to the banking system, allowing for stronger-than-expected bank lending (CNY640bn vs consensus of less than CNY600bn), and boosting M2 growth.
 
Overall, we judge the improving liquidity and monetary conditions as being in line with targeted easing monetary policy implemented since October 2011 and a proactive fiscal policy stance towards year-end. This has contributed to the better-than-expected December PMI (50.3 vs consensus 49.1) and may lead to a pickup in y/y IP growth in the month (BarCap: 12.8%) and stronger-than-expected Q4 GDP growth (BarCap: 8.5% y/y, 2011F: 9.2%). That said, we expect GDP growth to slow further and bottom in Q1 2012 as exports and investment decelerates, and we see inflation moderating.
 
The PBoC will likely maintain its 'prudent' monetary policy stance for now, while watching for downside risks to growth. Our baseline forecast remains for a stable policy rate and four RRR cuts in 2012. As we've reiterated, we see RRR being mainly used as a liquidity management tool, and the number of RRR cuts will really depend on overall liquidity supply (affected by FX flows including trade balances, the amount of open market operations including bills and repos maturing, fiscal deposits, etc) and demand conditions, which can be gauged from the 7d repo rates. We continue to look for one RRR hike of 50bp before the Chinese New Year, despite recent statements from the PBoC (the use of reverse repo and no repo auctions) suggesting the opposite has become more likely.  
   
Details of the December money and credit report show that new deposits surged to CNY1.43trn, compared with CNY324.7bn in November and a decline of CNY201bn in October. This follows a record-high increase of CNY1.6trn in household deposits. The surge in deposits reflects the usual year-end effects (deposits returning to meet regulatory checks as solicitated by banks), and appears also to be in line with our argument a few months ago that deposits would likely return to the banking system as off-balance-sheet and private lending activities subsided. Moreover, CNY1.23trn fiscal deposits were shifted from the treasury account held at the PBoC to the commercial banks this December. This has contributed to the easier liquidity as seen in the 7d repo rates in December, allowing for more new loans under the L/D ratio regulations.    
 
For the full-year 2011, judging from both quantity and price indicators, economy-wide monetary conditions have tightened from those in 2009-10, but remain easier than during the 2008 pre-crisis peak, in our view. We believe around 14% M2 growth will be supportive to real GDP growth of 8% in 2012.

While the successive RRR hikes in H1 2011 have disproportionately squeezed credit supply for SMEs and private businesses, total new loans in 2011 still reached CNY7.47trn, in line with our expectation of CNY7.5trn, and a mere 6% down from CNY7.95trn in 2010. While some technical factors (such as off-balance-sheet activities) have distorted the comparison of M2 growth, M2/GDP and credit/GDP have been noticeably higher than pre-crisis levels. Although private lending rates in some markets have surged to +20% per annum, the spreads between the estimated effective lending rates (based on PBoC data) and benchmark rates rose gradually from their lows during the financial crisis but stablised at end-Q3, suggesting economy-wide bank credit supply has lagged far behind demand.



source: BarCap