With U.S. stock markets closed today for Presidents’ Day, credit market news has an opening to move higher on the Investor Worry Bandstand. (The kids give it an 65, as they used to say on American Bandstand. But I think its moving up fast. The American Bandstand scoring scale went from 35 to 98 for some reason.)
Today’s news from China: China’s credit growth exceeded expectations in January. Aggregate financing rose to 4.64 trillion yuan ($685 billion) in January. Analysts and economists surveyed by Bloomberg were expecting aggregate financing of 3.3 trillion yuan for the month. New lending by financial institutions hit 3.23 trillion yuan. Economists had expected 3 trillion yuan in new lending. Credit always surges at the beginning of the year as Chinese companies lock up financing ahead of the Lunar New Year holiday. But this is the highest level of new loans by financial institutions since 1992, which is when this data series began. My favorite financial markets joke for today comes from Su Guofeng of the People’s Bank who told a press conference that today’s data shows a “reasonable” level of aggregate financing and that the People’s Bank is not flooding the system with liquidity. In the short run these numbers are a positive to investors and traders hoping that the central government is taking steps to support economic growth. In the longer run, piling more new loans onto a mountain of bad debt is unlikely to end well.
Although back in the United States, maybe investors who live in glass credit structures shouldn’t throw stones. Last week the New York Federal Reserve Bank reported a worryingly high level of delinquencies of 90 days or more on auto loans. The newest numbers are on rising delinquencies and defaults in the student loan market. Bloomberg has calculated, from that same New York Fed household debt data, that student loan delinquencies and defaults surged in 2018. Delinquencies of 90 days or more rose to a record $166.3 billion in the third quarter and then increased to new record of $166.4 billion in the fourth quarter. That percentage of delinquent and in default loans has remained around 11%, but the total of student loan debt grew to a record $1.46 trillion by December 2018.
Since most student loan debt is government sponsored, defaults on this debt won’t ripple out through the economy and banking system the way that the sub-prime debt crisis did in 2008 and 2009. But the total of student loans in arrears is now about twice the amount the U.S. Treasury provided to bail out the auto industry during the last recession.
For the economy as a whole, a rising level of loans in serious delinquency–that is past due by 90 days or more–is a signal of financial stress among a key demographic. The fastest growth in the serious delinquency category is from the 40-49 age group. That’s likely to be a reflection of parents borrowing to pay for their kids’ college expenses and then finding themselves struggling to remain current on their loans in an economy with slow wage growth.
A quick note: It’s important to remember that the economic cycle and the credit cycle are independent patterns although they do interact, especially at the point were debt, first, has maxed out in the credit cycle and the credit market has seen a rise in risky lending to borrowers with less than stellar credit ratings; and, second, where the economy is slowing. It doesn’t take a big slowdown in the economy to trigger a crisis in the credit market at that point in the credit cycle.
