Where does the money go, and where does it go? The central bank's monetary policy report is a blockbuster sound

CBN

2024-05-10 22:07Published on the official account of Shanghai Yicai

At present, the balance of broad money M2 on the mainland has exceeded 300 trillion yuan, and the scale of deposits and loans is also very large, and it is still growing rapidly. But at the same time, the domestic demand of the mainland economy is insufficient, the inflation level remains low, and the market has questions: where does all this money go? Is it effectively supporting the real economy? Are the funds idling?

In this regard, on May 10, the central bank explained "what is money" in column 2 of the "Report on China's Monetary Policy Implementation in the First Quarter of 2024" (hereinafter referred to as the "Report"), and by analyzing the flow of bank deposits and loans, it answered the question of "where does the money go, where is the money" and the market's question of "why the trend of financial and economic data is inconsistent" by analyzing the flow of bank deposits and loans.

Deposits are mainly held in the resident sector

At present, the currency of the mainland is divided into three levels: M0, M1 and M2. M0, or what we often call "cash", is the most active and the most liquid; M1 is M0 plus a unit demand deposit with slightly weaker liquidity; M2 refers to M1 plus less liquid unit time deposits, resident deposits, etc. By counting the deposits on the liability side of the bank, we can reflect "where the money is".

Since M2 can be derived through channels such as loans, it is also possible to analyze "where the money goes" through the bank's asset side.

From the perspective of "where does the money go", loans are mainly invested in enterprises and the supply side of the real economy. To analyze where the money goes, we must first look at the flow of loans.

In terms of sub-sectors, at the end of March, loans to mainland enterprises (institutions) and household loans reached 163 trillion yuan and 81 trillion yuan respectively, accounting for 66 percent and 33 percent of all loans respectively, and enterprises are still the majority of loans.

In other words, the loan is mainly used to support enterprises to expand investment and production, and residents to purchase houses and consume.

In terms of maturity and industry, medium- and long-term loans on the mainland now account for more than two-thirds, with heavy asset-heavy industries such as infrastructure, real estate, and manufacturing accounting for about half of all loans, while residents' non-residential consumer loans account for less than 10%. There is relatively more financing in the supply side and investment areas of the real economy, while the demand side, especially consumption, still has great growth potential.

The central bank can appropriately guide "where the money goes", but it mainly depends on the needs of economic agents themselves. Industry experts said that in recent years, the central bank has been actively guiding capital investment, with the acceleration of economic transformation and upgrading, the credit structure is also being optimized. However, on the whole, due to the lack of effective consumer demand, the supply side of the real economy and the investment sector have received more financing, which also explains to a certain extent why inflation in the mainland remains low in the context of high global inflation.

From the perspective of "where is the money", deposits are mainly in the residential sector. It will take time for the economic cycle to recover, and part of the money will be deposited in the residential sector.

According to the report, as long as banks are expanding their assets, once money is created, it will not decrease, but will only be transferred in circulation among enterprises, residents, governments and other departments.

At the end of March 2024, residents, enterprises, and governments accounted for 49%, 27%, and 14% of the total deposits of about 296 trillion yuan, up 7.1, 4.2, and 3.3 percentage points respectively from 2019, before the epidemic. Loans are mainly invested in enterprises, and will be reflected in residents' deposits through various expenditures, but due to the need for residents' consumption to recover and the lack of aggregate demand, the deposits are mainly retained in the residential sector, and are not further converted into corporate deposits through the expenditure of the residential sector.

At the same time, the trend of regularization of deposits by enterprises and residents has intensified. The proportion of time and demand deposits has risen from "June Fourth" in 2017 to "July Three" at present.

In addition, changes in the rate of return of various types of assets such as on-balance sheet deposits and off-balance sheet managed products affect residents' risk appetite and investment behavior, and residents will adjust their asset allocation accordingly, which is also an important factor affecting the proportion of residents' deposits.

"Due to the impact of the epidemic and the decline in risk appetite, enterprises and residents are more inclined to deposits with more stable returns, especially time deposits, at the mercy of assets, resulting in less "live money" in the economic cycle and poor circulation, which also explains why people and enterprises are short of money at the micro level, while the total amount of money in the financial system is still increasing. Industry experts say.

The focus of macroeconomic policies has shifted to increasing consumer demand and promoting the balance between supply and demand

There is already a lot of money stock, and the key is to revitalize the stock and smooth the circulation.

The "Report" pointed out that for a long period of time in the past, the mainland's economy maintained high-speed growth and the economy continued to increase, which will bring about an increase in the demand for funds, and the huge scale of deposits and loans is a reflection of the continuous financial support for the development of the real economy over the past many years. The People's Bank of China (PBoC) has made great efforts to regulate the "general gate of money supply", but it has also had a great impact on the structural problems of deposits and loans, such as "where the money goes, where does the money go".

The direction of loan investment mainly depends on the demand for bank credit from different types of borrowers, and the flow of deposits between various business entities is more affected by whether the supply and demand of the real economy are balanced and whether the circulation is smooth.

Experts said that in the future, the focus of macroeconomic policies should shift from increasing supply in the past to increasing consumer demand and promoting the balance between supply and demand. The central bank can regulate the "general gate of money supply", but the flow of funds such as deposits and loans mainly depends on the needs of different types of borrowers, and fiscal and other policies need to play a joint role. The mainland's direct financing and bond markets are developing rapidly, and these investment and financing activities are not realized through traditional bank deposits and loans. It will be more convenient for residents to buy over-the-counter bonds, and the demand for deposits, loans, and money will also decline.

Industry insiders also mentioned that with the development of direct financing, the growth rate of M2 will slow down in the future, but this is not a weakening of financial support, but a reflection of the optimization of financing structure and the improvement of financial quality and efficiency, and it is also a good thing to meet the financing needs of the real economy.

The central bank said that in the next stage, it will continue to follow the deployment of the CPC Central Committee and the State Council, and the prudent monetary policy will be flexible, moderate, precise and effective, guide the reasonable growth and balanced delivery of credit, revitalize the stock of financial resources, and keep the scale of social financing and money supply in line with the expected targets of economic growth and price levels. At the same time, we will support the joint efforts of policies to effectively mobilize the use of funds by business entities, so as to better realize that residents dare to consume, enterprises are willing to invest, and the government can support them, so as to promote the smooth circulation of the real economy.

(This article is from Yicai)