The report of the recent 20th National Congress of the Communist Party of China proposed that the focus of economic development should be on the real economy. Since the release of the report, major state-owned banks, policy banks, and large insurance companies of the country have all issued announcements stating that they will play a supporting role through increasing investment and financing, as well as aiding the steady and long-term development of the real economy.
It is estimated that the loans of the six major Chinese banks in the first three quarters increased by more than RMB 9.53 trillion compared with the beginning of the year. According to the statistics of the People's Bank of China (PBoC), loans increased by RMB 18.08 trillion in the first three quarters, a year-on-year increase of RMB 1.36 trillion. From these data, it is clear that the increase in loans from the six major banks accounted for more than 50%. Policy banks are also increasing their financial support for the real economy. As of the end of the third quarter of this year, the China Development Bank (CDB)'s infrastructure investment fund had invested RMB 360 billion in capital for over 800 projects. In addition, on October 12, the Agricultural Development Bank fully completed the credit grant of RMB 245.9 billion for 1,677 infrastructure projects, involving a total investment of nearly RMB 3 trillion. At the same time, the three main listed insurance companies of the country, namely China Life Insurance Company, People's Insurance Company of China, and Ping An have issued announcements on serving the real economy and people's livelihood. Based on the statistics, these three companies have invested a total of more than RMB 10.2 trillion to support the development of the real economy and serve the national strategy. The investment is mainly focused on infrastructure investment, reform of state-owned enterprises, emerging industries, and green development.
It is rather uncommon for Chinese financial institutions such as banks and insurance companies to issue announcements detailing their progress in serving the real economy. This actually shows their attitude towards the development policy determined by the 20th National Congress. In this regard, researchers at ANBOUND believe that this is an indication that financial institutions will increase financial support for the real economy, and such a move has become a directional trend in the financial field. It is certainly true that using financial resources to support the development of the real economy is the financial industry's objective and responsibility, yet how does it support the real economy?
ANBOUND's researchers are of the opinion that financial support for the real economy needs to follow the laws of the market while optimizing the channels of financial resource allocation. In another sense, such financial support should not just be about increasing credit, but also focusing on the reform of the financial system itself. On the one hand, the law of the market needs to be adopted to improve the efficiency of the use of financial resources; on the other hand, financial institutions are required to transfer profits to the real economy.
For a long period of time, in the process of reform and innovation in the financial sector, there were funds circulating within the financial sector without entering the real economy, as well as market arbitrage. This not only disrupted the financial market but also made it difficult for real enterprises to obtain financial support. For this reason, there is the policy orientation of the financial sector to support the real economy. However, from the perspective of economic and market development, the root cause of this is the decline in the efficiency of the real economy. Compared with sectors like real estate and the internet, and local government financing platforms, the profits of real enterprises are greatly reduced. Many of these industries have seen excess productivity. The consequence of these structural problems is the decline in investment efficiency, which also makes it difficult for financial institutions to obtain risk returns from the process of supporting the real economy. As a result, funds are concentrated in the real estate sector.
There is a sharp shrinking of the real estate sector under the policy requirements for the developer's balance sheet, as well as the constraints of capital regulations for the internet sector. These are two sectors with the fastest growth rate and highest return on investment, and they are also areas where risk is concentrated as the economy declines. Such a situation not only drags down the overall growth of the country's economy but also brings huge potential losses to the financial system. Professor Liu Yuhui of the Chinese Academy of Social Sciences recently pointed out that the stagnation and complication of the development in the fields of finance and real estate in the past should be resolved. While certain emerging fields and some strategic sectors have received policy support and encouragement, the corresponding scale remains insufficient to support the overall economy, and the stock scale of traditional sectors is still rather huge. Increasing investment demand and improving capital efficiency continue to be the key for the real economy to obtain financial resources. There is no shortage of money in China's financial system, and what is still lacking is investment opportunities that match the risks, so that effective investment benefits can be obtained. This is also the main source of credit differentiation and capital idling in the country's financial market for quite some time.
Due to both internal and external shocks such as the outbreaks of COVID-19 and geopolitical risks, China sees weak economic demand, resulting in a possible "liquidity trap". CICC economist Peng Wensheng believes that the loose monetary policy did not play a role in the case of declining demand, forming a typical "liquidity trap". Since the beginning of this year, the situation where the monetary growth rate is higher than that of social financing has been going on for a long time. Liu noticed that the current balance sheets of enterprises, households, and local governments are declining. "From a financial point of view, it is an irreversible liquidity trap… Looking at China's future risk-free interest rates and long-term risk-free interest rates, my judgment is that we are probably documenting the start of new record lows", Liu added.
Given the long-term economic slowdown and declining investment returns, the extensive investment of financial resources due to the implementation of policies will not solve the structural problems of the real economy. Instead, it will further aggravate the imbalance between supply and demand and lose the efficiency of financial resources. This can manifest as a further downturn in economic growth. ANBOUND's researchers noted that financial support for the real economy requires intensive cultivation in emerging, manufacturing, and strategic sectors. It is also necessary to comply with the laws of the market and the laws of financial development, so that the market can fully play its role.
Final analysis conclusion:
For the Chinese financial system to implement the policy of "persistently focusing on the development of the real economy", this requires long-term precise measures, so as to avoid blindly loosening money that could bring about future disaster.
