With everyone, including Pimco, now acknowledging what we said most recently in February, namely that China's credit impulse is the main, if not only variable, that determines the fate of global reflation...

... the latest credit numbers released by the PBOC overnight very closely watched by macro traders around the globe in light of the ongoing liquidity discussions surrounding the deleveraging narrative. 

On the surface, the data wasn't particularly exciting, with new bank loan data surprising modestly on the upside, most likely the result of less stringent quantitative controls by the central bank instead of a sharp pickup in bottom-up demand from specific sectors. Specifically, new loans amounted to RMB1.1 trillion, above the 815BNexpected, while the broader, Total Social Financing dipped from March's all time high of RMB2.12 trillion to 1.39 trillion, also slighly above the RMB1.15 trillion. This amounted to a 14.5% increase in TSF stock Y/Y, below the 14.8% in March, and another confirmation that China's credit is slowing down. Mortgage loan supply remained steady at RMB444 bn, little changed from the RMB450 bn in March, despite the property sector supposedly tightening (it would also explain why home prices have again rebounded in recent months).

Overall M2 money supply fell as well, and at 10.5% Y/Y, down from 10.6% in March, it missed expectations of a 10.8% increase.

What was most notable, however, was the "entrusted loans" category, (the broadest proxy for ‘shadow financing’) which confirmed China's recent crackdown on shadow banking, and posted the first contraction in a decade, going all the way back to 2007. 

From the ‘liquidity facilities’/market-ops perspective, 120B yuan was drained this week via reverse-repos, although the PBOC's medium-term lending facility conducted 459B of yuan loans (6m and 12m) against 410B of similar loans rolling-off this month, hence a net 49B injection of long-term liquifdity.

And while shadow banking is now clearly in reverse as a result fo the government's crackdown, today's credit data, and the decision by the PBOC to inject liquidity via MLF, are likely to provide some reassurance to trader sentiment, which had abruptly turned quite negative in recent weeks. These developments clearly reflect policymakers’ changing views amid signs of stress in the financial markets and early signs of slowdown in the real economy, in a very politically important year. As Goldman adds, these concerns are also the concerns of market participants. Market participants didn't seem to react to the tightening at first, but in recent weeks (following weaker March credit data, declines in April PMIs, and further announcements by regulators) they appear to have become quite worried about the shift.

The CBRC stated they would give 3-6 months to financial institutions to adjust for the tighter regulations and treat individual cases with flexibility after that. As a result, policymakers appear to have started to adjust their policy stance incrementally, which is best described as "mixed" instead of all round tightening. So today's data is not just about very near-term demand growth and policy stance, but also gives hints about the policy stance in much of the rest of the year.

The MOF has not yet released information on April fiscal revenue and expenditure, though one would expect fiscal expenditure growth to have slowed after the exceedingly strong pace in March. This would represent a drag on broad money growth, though its certainly not the only one. The other likely driver was inter-financial institution products not included in RMB loans, which likely fell amid the tightening of financial regulations.

Furthermore, as RBC notes, the hysterics on ‘will they/won’t they’ were further escalated overnight with headlines

• *CHINA'S MONETARY POLICY IS RELATIVELY TIGHT IN 2017: CHINA NEWS and
• *PBOC TO CONTINUE PRUDENT, NEUTRAL MONETARY POLICY.

Why does all this matter? As RBC's Charlie McElligott writes in his daily note, the focus on the liquidity-/deleveraging- story continues to be two-fold.

First is the ‘flow vs stock’ component of the debate—as it’s not the ‘absolute scale’ of the net injection or contraction at a point in time.Without question, the recent (quite MODEST) efforts to ‘tighten’ liquidity still by-and-large haven’t impacted credit expansion per se, as evidenced by the uptick in new loans noted above.But what the RBC analyst is fixated-upon is that concept of credit-/liquidity- “impulse,” as the ‘rate of change’ / directional trajectory moves to negative (panel 1 and most notably panel 3, which specifically is updated post the overnight data):

Second is the rates-component of the tightening, which we are seeing displayed from overnight to 3m SHIBOR, to 1Y IRS to 10Y yields.Expect the PBoC will continue to use the Fed’s own tightening-efforts as air-cover for their own.

Finally putting all elements of the reflation trade together, McElligott next looks at crude.

Crude’s price-action is unch to small up (boosted now by Dollar’s hard fade post-weak data), with core CPI disappointing (esp relative to the PPI) and following the OPEC production-cut ‘compliance’ update.The OPEC release showed that despite aggregate ‘over-compliance’ (from an absolute ‘cut vs pledge’ perspective, north of 100%), only 5 OPEC nations are actually ‘in-compliance’ with the prescribed levels (Kuwait, Qatar, Saudi Arabia, U.A.E. and Venezuela are ‘over-compliant,’ while Algeria, Ecuador, Gabon and Iraq haven’t complied with the production-cut agreement this year—H/T Ryan Businski). 

I think part of the calculus now becomes at what point do you see splintering in both OPEC / non-OPEC participants following endless jawboning of ‘production cuts,’ which is now proving to be a ‘diminishing returns’ policy.  

There is a real ‘prisoner's dilemma’ developing if some of these countries are increasingly of the view that they're being denied vital revenues to maintain social order / state 'legitimacy by payoff' to citizens, due to the still rampant speculation that the original deal was a Saudi ‘holy grail’ gambit as it pertains to the Aramco IPO.

Still, not even a surge in oil would be enough to offset a Chinese credit crunch, so keep a close eye on Beijing and the PBOC in particular: should April's collapse in entrusted lending spread to other loan categories, that will be it not only for the reflation trade of 2017, but may well unleash the next bout of global deflation out of China, which will then promptly flood the rest of the world.