China's July Money Data - Rescue Funding

China’s July monetary data gives a coherent, if slightly complicated, picture of the attempt to staunch the financial bleeding from the stockmarket’s fall.  In total, it describes a rapid emergency financial re-intermediation by the banking system, whilst at the same time shows the financial system in total withdrawing funding from the real economy.  The hope must be that July’s data shows merely Part 1 of the rescue, with the crucial bit of Part 2, as yet unseen, being the banking system being willing to restore funding to the ‘real economy.’

The key data is the discrepancy between the Rmb1.48tr in new bank lending made in July - 1.7SDs above historic seasonal trends, and the strongest since June 2009 - and the miserable Rmb589bn in new bank lending recorded in the monthly aggregate financing series. Since the point of the aggregate financing data is to track financing made to the ‘real economy’, we are left to conclude that the difference between the two measures of banks lending - 891bn yuan of it - represents bank lending to non-bank financial institutions. The rescue funds, in other words.

In the short term, the good news is that the money lent to rescue financial institutions has been recirculated right back to the banks, with deposits rising 2.17tr yuan during July.  The less-good news for now is that:

• the banks are not lending that back into the ‘real economy’. Not only was lending to the real economy down at just 589bn yuan in July, the lowest since October 2014, but in addition, banks withdraw a net 331bn yuan of bankers’ acceptances during the same month. The net effect must be a sharp squeeze on corporate working capital. 
• the second bit of bad news is that the rise in deposits is accompanied by a sharp fall in liquidity preference (M1/M2) to a new record low as speculative and transactional demand for money is dulled by financial and economic uncertainty.