Authors: Zhong Zhengsheng, Zhang Lu, Chang Yixin (Zhong Zhengsheng is a director of the China Chief Economist Forum and the chief economist of Ping An Securities)
Key takeaways
On the evening of May 10, 2024, the People's Bank of China released the "Report on China's Monetary Policy Implementation for the First Quarter of 2024", which has a lot of ink on how to view the slowdown in financing growth. This is also an attempt to communicate with the capital market in the face of a significant slowdown in the growth of social finance and money supply in April.
Many of the new expressions added in this report are centered on the concept of "quantity" of monetary policy. Including: "The fundamental reason for the current low price level is the insufficient demand and imbalance between supply and demand in the real economy, not the insufficient money supply"; "There is already a lot of money stock at the moment"; "The People's Bank of China has made great efforts to regulate the 'general gate of money supply', but the impact of the real economy on the structural issues of deposits and loans such as 'where the money goes, where the money is' is also very great"; "The growth of the huge monetary aggregate may slow down, which does not mean that the intensity of financial support for the real economy is reduced, but the reflection of the improvement of the quality and efficiency of financial support."
General Secretary Xi Jinping pointed out at the 2023 Central Financial Work Conference that "deleveraging, thousands of moves, and failing to control the currency are useless moves", and as early as July 2013, the speech at the meeting of the Standing Committee of the Political Bureau of the CPC Central Committee proposed to "strive to revitalize the stock of money and credit and make good use of the increment". In the first quarter of this year, the leverage ratio of China's real sector announced by the Chinese Academy of Social Sciences further rose to 294.8%, and has risen by 48.2 percentage points since the epidemic. Although the upward trend in the leverage ratio has the impact of a slowdown in GDP growth at the denominator end, it is also necessary to realize in the evolution of policy thinking that monetary policy will need to pay more attention to "price" and weaken "quantity". The central bank emphasized that "give full play to the role of the reform of the loan market prime interest rate and the market-oriented adjustment mechanism of the deposit interest rate, and promote the steady and moderate reduction of corporate financing and household credit costs", which includes the necessity of preventing high-interest interest rate accumulation, reducing policy interest rates such as MLF, and reducing the reserve requirement ratio in a timely manner.
On the evening of May 11, the People's Bank of China released a statistical report on financial data for April 2024.
1. Social finance rarely has a negative growth. In April, the number of new social finance shrank for the first time since statistics began; The year-on-year growth rate of social financing stock fell by 0.4 percentage points to 8.3%, a record low. Structurally: 1) The pace of government bond issuance is slow, and ultra-long-term special treasury bonds are still in the early stage of preparation due to the insufficient reserve of new projects of local special bonds. 2) Weak credit facilities and squeezing off-balance sheet bills. In April, the scale of new credit of social financing caliber was the second lowest since 2006, and the amount of off-balance sheet undiscounted bills shrank sharply year-on-year. 3) Weak direct financing of corporate stocks and bonds. Due to the strong supervision of local hidden debts, the issuance and financing of urban investment bonds have shrunk, and they have also been affected by the stricter approval of IPO refinancing.
2. Insufficient effective demand for credit. The total amount of new loans in April was stable, with a slight year-on-year increase, but the structure was not good: the "impulse" of bills was distinctive, the total amount of corporate loans was stable, and the loans to the residential sector contracted. Two points worth paying attention to: 1) The rapid shrinkage of short-term loans of enterprises may reflect the effect of "air defense turnaround". In April, the central bank banned "manual interest supplements", which helped to regulate the "low loan and high deposit" idling arbitrage of enterprises, which was reflected in the financial data of the simultaneous shrinkage of short-term loans and corporate deposits, which were at the lowest value in the same period since statistics in April. 2) The residential sector is still deleveraging. Since 2022, the growth rate of residents' deposits has shifted upward, while the growth rate of loans has fallen, and the growth rate of deposits has continued to be higher than that of loans, inferring that the asset-liability ratio of the residential sector tends to fall.
3. The growth rate of money supply has "bottomed out". In April 2024, the year-on-year growth rate of M1 fell by 2.5 percentage points to -1.4%, and the year-on-year growth rate of M2 fell by 1.1 percentage points to 7.2%, both of which are at the second and lowest point in history since statistics began. The policy demands of financial "air defense" and the reality of insufficient effective demand for credit have jointly created a "bottoming out" of the growth rate of money supply. This is also the reality of the first-quarter monetary policy report, "the current money stock is already quite a lot", and "the growth of the huge monetary aggregate may slow down".
One
Takeaways from the Cargo Administration Report
On the evening of May 10, 2024, the People's Bank of China released the "Report on China's Monetary Policy Implementation for the First Quarter of 2024", which has a lot of ink on how to view the slowdown in financing growth. This is also a communication with the capital market in the context of a significant slowdown in the growth of social finance and money supply in April.
The central bank has added some new expressions in this report, many of which are based on the concept of "quantity" of monetary policy. Including: "The fundamental reason for the current low price level lies in the insufficient demand and imbalance between supply and demand in the real economy, rather than insufficient money supply", "maintain the supply of money and credit in accordance with the suit", "increase efforts to revitalize the stock of financial resources, pay close attention to the situation of capital precipitation and idling, and promote the improvement of the efficiency of capital use".
General Secretary Xi Jinping pointed out at the 2023 Central Financial Work Conference that "deleveraging, thousands of moves, and failing to control the currency are useless moves", and as early as July 2013, the speech at the meeting of the Standing Committee of the Political Bureau of the CPC Central Committee proposed to "strive to revitalize the stock of money and credit and make good use of the increment". In the first quarter of this year, the leverage ratio of China's real sector announced by the Chinese Academy of Social Sciences further rose to 294.8%, and has risen by 48.2 percentage points since the epidemic. Although the upward trend in the leverage ratio has the impact of a slowdown in GDP growth at the denominator end, it is also necessary to realize in the evolution of policy thinking that monetary policy will need to pay more attention to "price" and weaken "quantity". The central bank emphasized that "give full play to the role of the reform of the loan market prime interest rate and the market-oriented adjustment mechanism of the deposit interest rate, and promote the steady and moderate reduction of corporate financing and household credit costs", which includes the necessity of preventing high-interest interest rate accumulation, reducing policy interest rates such as MLF, and reducing the reserve requirement ratio in a timely manner.
In addition, the first two columns of the report also focus on how credit growth and money supply are viewed.
The core thesis of column 1 "The relationship between credit growth and high-quality economic development" is that the relationship between credit growth and economic growth in the mainland tends to weaken, and the slowdown in the growth rate of total credit does not mean that financial support for the real economy is weakened.
- First, in the process of economic transformation, the financing demand for real estate and local financing platforms, which are highly dependent on credit funds, has declined, while the proportion of asset-light services has continued to increase, so "even if credit growth is lower than in the past, it is enough to support the economy to maintain stable growth".
- Second, the stock of money and credit is not low, and "credit growth has been transformed from a supply constraint to a demand constraint, and there is still a process of understanding and adapting to this change."
- Third, direct financing can and needs to play a benign substitution effect. "High-tech and innovative enterprises have not yet experienced a complete and mature life cycle, and what they urgently need is funds that match their characteristics of high risk, high returns, strong professionalism, and fast iteration of knowledge and information, mainly direct financing such as equity funds."
We believe that financial data has long occupied an important position in macro research, because in the case of the "seesaw" of real estate and infrastructure as the main driving force of economic growth, the growth of financing scale is often about half a year ahead of the economic cycle, which is behind the time lag from real estate sales to real estate investment, and the process of infrastructure project financing to the formation of physical workload. At present, the change in the pattern of real estate supply and demand, the cooling of the local credit engine, and the significant decline in the demand for financing are the main reasons for the deceleration of financial data. However, it should also be noted that in this process, the downward pressure on the economy is actually accompanied, and the credit growth situation is more the result of China's economic operation, reflecting that the problem of insufficient aggregate demand still deserves attention.
Column 2, "Looking at the Flow of Funds from the Distribution of Deposit and Loan Structure", attempts to answer the question of "where does the money go, where does the money go".
- As for "where does the money go": heavy asset industries such as infrastructure, real estate, and manufacturing account for about half of all loans, while residents' non-housing consumer loans account for less than 10%. The supply side of the real economy and the financing demand in the investment field are relatively large, while the demand side, especially consumption, still has great growth potential.
- As for "where is the money": 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. The key fact reflected in this is that since household consumption, which is the source of a virtuous cycle of the economy, needs to be further recovered, deposits are mainly retained in the household sector, and are not further converted into corporate deposits through household sector expenditure.
- The final focus of this part of the analysis is still on the view of the money supply: "the current money stock is already quite large". "The People's Bank of China has made great efforts to regulate the 'general gate of money supply', but it also has a great impact on the structure of deposits and loans such as 'where the money goes, where does the money go'" (which reminds us of the so-called "push rope effect" of monetary policy). "The growth of the huge monetary aggregate may slow down, which does not mean that the intensity of financial support for the real economy is reduced, but the reflection of the improvement of the quality and efficiency of financial support." "Internationally, economies with more developed direct financing no longer use the money supply as an intermediary target for monetary policy."
In our view, China's current capital flow and precipitation are not significantly different from those of the United States and Japan. As of the end of 2023, from the perspective of the outstanding debt structure of the U.S. credit market, residential mortgage loans accounted for 18%, consumer loans accounted for 6.8%, the commercial sector accounted for 29%, government departments accounted for 40%, and consumer loans accounted for less than 10% (it should be considered here that government bonds account for about 18% in China's social finance, so the proportion of consumer loans in the overall social finance will be lower). From the perspective of the structure of financial asset holders in the United States, residents and non-profit institutions account for 72%, non-financial enterprises account for 23%, and government departments account for 5%, and financial assets are also mainly concentrated in the residential sector, which is also the basic embodiment of "hiding wealth from the people". Japan's household sector holds relatively low financial assets, accounting for about 50 percent. From the perspective of the capital flow table, the proportion of funds used by the resident sector in all Chinese financial transactions was 53% on average from 2012 to 2019 and 66% from 2020 to 2022.
In other words, it is a normal result for the household sector to "borrow less money and save more money", and the monetary policy has further shifted from focusing on "scale" to focusing on "structure", focusing more on the optimization of the transfer between various industries in the enterprise sector, and further improving the efficiency of the transformation of savings (in the household sector) into investment in the (corporate sector). That is, to do a good job in the "five major articles" emphasized by the central government, and to provide effective support for key areas and weak links such as inclusive finance, scientific and technological innovation, and green development. This support will also be more reflected in the "price", through refinancing tools, enhanced loan availability, etc., to reduce the financing cost of the corporate sector.
Two
Social finance rarely has a negative increase
In April 2024, the scale of new social financing will decrease by nearly 200 billion yuan, the first shrinkage since statistics. April is a small month for financing, and the scale of social financing tends to decline seasonally, but the average increase in social financing in the same period in the past three years has also been 1.3 trillion yuan. In April, the year-on-year growth rate of social financing stock fell by 0.4 percentage points to 8.3%, a record low. There are three threads on the structure:
- The pace of government bond issuance was slow, dragging down the growth rate of social financing stock by 0.16 percentage points. The lack of reserves for new projects of local special bonds, and the fact that ultra-long-term special treasury bonds are still in the early stage of preparation, all restrict the pace of government bond issuance.
- Weak credit financing and squeezing off-balance sheet bills dragged down the growth rate of social finance by 0.13 percentage points. As the main part of social finance, the new scale of social finance credit in April was about 300 billion yuan, the second lowest in the same period since 2006 (only slightly higher than April 2022, which was severely affected by the epidemic). In April, the total amount of on-balance sheet and off-balance sheet bank acceptance bills increased by nearly 400 billion yuan year-on-year, but the amount of off-balance sheet undiscounted bills shrank by more than 300 billion yuan year-on-year, which was severely squeezed by the "impulse" credit of bank bill discounting.
- The weak direct financing of corporate stocks and bonds dragged down the growth rate of social financing stock by 0.06 percentage points. The scale of corporate bond financing was less than 50 billion yuan, and the scale of equity financing was less than 30 billion yuan, reaching the lowest point in the same period since 2009 and 2010 respectively. This is not only due to the strong supervision of local hidden debts, the shrinkage of urban investment bond issuance and financing, but also the impact of stricter approval for A-share IPOs and refinancing.
Three
Effective demand for credit is insufficient
The total amount of new loans was stable. In April 2024, new RMB loans amounted to RMB730 billion, a slight increase year-on-year; The year-on-year growth rate of loan stock was flat at a record low of 9.6%.
Poor credit structure: 1) The "impulse" of bills is distinctive. In April, the new bill financing reached 800 billion yuan, the highest value since statistics began in 2007, and the growth rate of loans increased by 0.3 percentage points from the previous month. 2) The total amount of corporate loans was stable, with short-term loans and medium- and long-term loans "one eliminating the other", with the former decreasing by 410 billion yuan and the latter increasing by 410 billion yuan. 3) Loans to the residential sector contracted, with short-term loans and medium- and long-term loans falling by more than 500 billion yuan.
Two points of information are worth paying attention to: First, the rapid shrinkage of short-term loans of enterprises may reflect the effectiveness of the "air defense transfer" of funds to a certain extent. In April, the People's Bank of China (PBoC) issued an initiative to guide interest rate self-discipline, which clearly requires banks not to promise or pay back interest to customers in any form that exceeds the authorized upper limit of the deposit interest rate. The prohibition of "manual interest supplementation" will help standardize the idling arbitrage of "low loans and high deposits" of enterprises, which is reflected in the financial data of the simultaneous shrinkage of short-term loans and corporate deposits, which were at the lowest value in the same period since statistics were recorded in April. Second, the residential sector is still "deleveraging". Since 2022, the growth rate of household deposits has shifted upward, while the growth rate of loans has declined, and the growth rate of deposits has continued to be higher than the growth rate of loans, which can be inferred that the asset-liability ratio of the residential sector tends to fall.
Four
Money supply growth "bottomed out"
In April 2024, the year-on-year growth rate of M1 fell by 2.5 percentage points to -1.4%, and the year-on-year growth rate of M2 fell by 1.1 percentage points to 7.2%, both of which are at the second and lowest point in history since statistics began. The policy demands of financial "air defense" and the reality of insufficient effective demand for credit have jointly created a "bottoming out" of the growth rate of money supply. This is also the reality of the first-quarter monetary policy report, "the current money stock is already quite a lot", and "the growth of the huge monetary aggregate may slow down".
Risk warning: the effect of the steady growth policy is less than expected, the degree of overseas economic recession exceeds expectations, and the credit risk of real estate enterprises spreads.