Prioritize Quality and Efficiency Over Financial Volume

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Prioritize Quality and Efficiency Over Financial Volume

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The landscape of China's economy is currently undergoing vast transformations, marked by shifting financial trends and varying demands from the real sectorRecent data indicates that China's broad money supply, known as M_2, has stabilized over the past two monthsFurthermore, August figures regarding new social financing and yuan loans have surpassed market expectations, reflecting a sound backdrop of gradual structural transformation within the economyThis aligns with a robust support for the real economy, even as the financial data remains anchored at high levels.

Throughout 2023, a slowdown in the growth of financial aggregates has been observed, attributed to a variety of factorsOne significant issue is the relatively weak demand for loans within the real economyA recent survey conducted by the central bank revealed that the overall demand index for loans dipped from 71.6% in the first quarter to 55.1% in the second quarter—the lowest recorded since the data became available in 2004. In years past, there was a robust demand for loans in China, yet this year’s decline in credit growth can be primarily attributed to constraints on the supply sideThe decrease in both the loan demand index and loan growth suggests that restrictions are now pivoting from the supply side to the demand side.

In this intricate and fluctuating economic climate, the project reserves of financial institutions are crucial for ensuring stable growth and development within the economyHowever, one pressing concern is the noticeable insufficiency in project reserves currently on hand.

Project reserves held by financial institutions can be likened to an "arsenal," serving as a fundamental base for credit issuanceThey represent the potential future allocation of credit and act as a pivotal driving force for economic development

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The magnitude and availability of these reserves are akin to a "barometer" for the economy, providing an effective means of gauging the vigor of real economic demandWhen project reserves are plentiful, it indicates that financial institutions possess adequate resources to support various projects in the real economy, signaling vigor and robust demandConversely, insufficient project reserves may suggest that the real economy faces challenges, such as waning momentum and shrinking demand.

For instance, let’s consider a major economic province in Eastern China, historically playing a pivotal role in the national economic frameworkThe recent in-depth investigation of numerous financial institutions in this province revealed a concerning trend: in the second quarter, both the amount and number of project reserves held by these institutions showed a dramatic decline of more than 20 percentage points compared to the first quarterThis shift indicates a significant reduction in the resources available to financially support the development of the real economy in just one quarterThis predicament could stifle credit issuance, preventing numerous real economy projects from launching or progressing due to a lack of financial backingThe ramifications may create a ripple effect, affecting corporate expansion plans, job creation, and overall economic activity in the regionSuch continued challenges would undoubtedly pose considerable risks to stable growth not only within this province but across the national economy.

Another factor involves the so-called "squeezing out excess water" from financial data, which may yield a downward effect in the short termRegulating manual interest supplements primarily aims to curtail the potential for companies to engage in capital turnover arbitrage, thus guiding funds toward more productive usesWhen companies utilize idle funds to settle overdue payments, operational efficiency improves

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According to the central bank's entrepreneur survey, the second quarter saw an increase in both the index for corporate fund circulation and the sales recovery index, surpassing 1 percentage point compared to the same time last yearThis data suggests that post “squeezing out the excess,” financial backing for the real economy is indeed substantial, with enhanced quality and efficiency.

In parallel, the structure of deposits is also witnessing notable changesThe narrow measure of money supply, known as M_1, which mainly covers corporate demand deposits, can often reflect firms' liquidity conditionsRecent declines in M_1 growth have been chiefly linked to the management of manual interest supplements and a shift from deposits to financial investmentsOverall, while recent data shows a continued increase in total deposits, there’s a noticeable diversion of demand deposits, particularly from companies.

As the modernization of the economic and financial system advances, the correlation between aggregate monetary indicators and actual economic activity is generally diminishingSeveral factors influence the relationship between money supply and key economic indicatorsFirst, changes in industrial structure play a critical role; unlike traditional sectors, emerging industries rely heavily on technological innovation and capital marketsSecond, the depth of financial markets also affects how monetary supply is absorbed and utilizedThird, the marginal utility of money can fluctuate—if a significant amount of currency isn't used for consumption or investment, the stimulating effects of monetary supply on economic growth may weaken over time.

Thus, rather than merely monitoring the growth rate of financial aggregates, a more comprehensive approach is needed to truly assess the efficacy of financial support for the real economyCurrently, China is navigating through a transformative upgrade, progressing towards a phase of high-quality development—absent thoughtful observation, the existing focus on volume growth could hinder necessary credit expansion

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