Will China's financial crisis crash the dry bulk shipping party? (Part 3 of 7)
As we discussed in the previous article, loans are an essential factor that drives China’s economic growth, dry bulk shippers, and the Guggenheim Shipping ETF (SEA). The National Bureau of Statistics breaks domestic loans into short- and medium- or long-term loans. Although they tend to move together, the short-term loans are for short-term operating expenses, and the medium- and long-term loans are used for business, industry, and real estate investments.
Divergence in loan growth
For the month of November 2013, China’s short-term loans grew 18.0% compared to the same period last year. Medium- and long-term loans grew 12.9%, up from 12.6% in October—a positive trend for real economic growth. While the two have moved together in the past, they’ve diverged since late 2010. Medium and long-term growth used to be higher, towards 20%, but is now averaging slightly above 10%.
Conversely, short-term loans growth (which used to be just ~12.5%) grew to 20.0%, reflecting increased rollover of debt and servicing costs caused by a buildup of overcapacity in the economy and support for shadow banking. The decline in short-term loans growth reflects the government’s move to reign in on shadow banking and a signal that cheap credit, which helped fuel banks’ profits, will no longer be available.
Loans to households
If China is to transition towards a more consumer-orientated economy, household debt is perhaps an important indicator to watch for. For the month of November, loans to households grew 23.59% compared to the same period last year, below October’s 23.82%. Loan growth stopped rising higher in July, likely caused by a tightening in the credit that banks are able to give out. Yet the declines we’ve seen don’t quite suggest an imminent collapse in China’s financial sector.
A spillover impact of short-term loans on the financial sector’s overall health is something to look out for. If loan growth starts to deteriorate by a significant amount, it could spell a negative for China’s economy and the Guggenheim Shipping ETF (SEA). Dry bulk companies like DryShips Inc. (DRYS), Navios Maritime Partners LP (NMM), Navios Maritime Holdings Inc. (NM), Safe Bulkers Inc. (SB), Star Bulker Carriers Corp. (SBLK), Baltic Trading Ltd. (BALT), Diana Shipping Inc. (DSX), and Knightsbridge Tanker Ltd. (VLCCF) would also be negatively affected.
Browse this series on Market Realist:
- Part 1 - Why the financial system affects dry bulk shipping companies
- Part 2 - Must-know: Why growth in new loans impacts dry bulk shippers
- Part 4 - The key relationship between money supply and dry bulk shipping