At the end of May, China’s State Council began to intensify efforts to stabilize the overall economic market. With this, the severe situation facing the country's economy began to be known to the public. Even prior to this, the Chinese economy was already on a downward trajectory. Coupled with the impact of strict COVID-19 measures in the first half of this year, the economy is naturally in a systemic decline, to the extent that actions have to be taken to salvage it.
From the perspective of the economic system, the market's demand for and absorption of financial resources is an important observation angle. Specifically, changes in money supply and the social financing scale are two key indicators.
According to data from the People's Bank of China, at the end of April this year, the growth rates of the broad M2 money supply and social financing scale were 10.5% and 10.2% respectively, maintaining a high level of more than 10%. Excluding seasonal factors, financial activity declined markedly in April. In terms of increments, RMB loans increased by RMB 645.4 billion in April, a year-on-year decrease of RMB 823.1 billion. Compared with March this year, new RMB loans in March were RMB 3.13 trillion, and it was RMB 2.48 trillion in April. In terms of credit structure, household loans decreased by RMB 217 billion, a decrease of RMB 745.3 billion year-on-year. Loans to enterprises grew by RMB 578.4 billion, a decrease of RMB 176.8 billion year-on-year. Among them, short-term loans decreased by RMB 194.8 billion, medium and long-term loans increased by RMB 265.2 billion, and bill financing increased by RMB 514.8 billion.
Driven by policies to stabilize the economy, financial data showed some signs of improvement in May, with credit data and social financing data rebounding. At the end of May, the M2 balance was RMB 252.7 trillion, an increase of 11.1% year-on-year, and the growth rate was 0.6 and 2.8 percentage points higher than the end of last month and the same period of the previous year, respectively. The scale of new social financing in May increased significantly compared with the previous month and the same period of the previous year. The increase in the social financing scale in May 2022 was RMB 2.79 trillion, RMB 839.9 billion more than the same period of the previous year, and a significant improvement from the RMB 910.2 billion increase in social financing scale in April.
While the financial data show there are increases in expectations in May, the real market demand has not actually recovered effectively. Researchers at ANBOUND noticed that some urban commercial banks have reportedly facing a situation where the credit line is loose, but the customer's willingness to lend is relatively reduced and there is no demand for repayment. Some grass-roots sub-branches of state-owned banks also expressed that there is a decline in the willingness of customers to lend, and such a circumstance is more prominent in certain localities. Unlike in the past when companies sought loans, now although there is not much of an issue with banks lending money, customers are not very willing to lend and demand has decreased. To this end, researchers at ANBOUND suggested that the recovery as indicated in the financial data is merely an "illusion of prosperity" at the data level, hence there should not be too much optimism in this regard.
signs can be found confirming the lack of credit demand in the market. Li Yang of the National Institution for Finance & Development said that it is normal for companies to actively seek loan support from financial institutions in years of normal economic development, but now the relationship between China’s finance and the real economy has reversed, and companies are reluctant to expand reproduction and instead seek debt minimization. If the situation of companies no longer borrowing appears on a large scale, this would indicate that the economic situation is rather pessimistic, and the business expectations for the future will appear to be doom and gloom. On June 25, at the 2022 Tsinghua PBCSF Global Finance Forum, Lin Ping, Deputy President of the Guangzhou Branch of the People's Bank of China, also said that the current macroeconomic operation of the country is mainly faced with insufficient demand, lack of confidence, and unsatisfactory expectations from micro-subjects. It would be difficult to effectively resolve the problems of economic development merely by improving the liquidity of market entities alone. In the view of ANBOUND researchers, not only is the liquidity injection ineffective at the monetary level, the support at the fiscal level would not be able to solve the fundamental problem as well.
In the face of ineffective monetary and fiscal support policies, what then, are the available options?
If there is a lack of confidence in microeconomic entities, the focus of measures should not be on the increase of the intensity of various resources for enterprises with the hope that they can immediately raise capital expenditure, expand reproduction, or boost recruitment to solve the employment problem. When businesses are with insufficient confidence and unstable expectations, the most appropriate policy should be paying attention to cultivating business confidence and gradually stabilizing the expectations.
What policy then, can achieve this aim? Researchers at ANBOUND believe that in the current situation, neither the amount of money spent in the financial policy, the increase in credit in the credit policy, nor the adjustment of interest rates in the monetary policy matters as much as not repeating the tightening and lockdown policy. This is to allow businesses to gradually stabilize under the most basic market environment.
Whether in Shanghai, the hardest-hit area hit by the COVID-19 outbreak in the first half of this year, or in Beijing, which is still being affected by the pandemic, there are a large number of small, medium, and micro enterprises closing down or even going bankrupt due to the strict measures imposed. Various policies for resumption of work and production, tax reduction, and loans might be more effective for large enterprises. However, for the numerous small, medium, and micro enterprises, as long as strict lockdown and control measures that cause business activities unable to operate normally, low interest rates and loans will not be able to do much good.
Researchers at ANBOUND are of the opinion that the sluggish business financing demand reflects a bigger problem China's economic system is currently facing. When the 2008 financial crisis hit the world, Chinese enterprises felt the impact too, yet they still responded positively to the RMB 4 trillion stimulus policy and were willing to increase investment and expand development. As a result, the Chinese economy quickly recovered. Fast forward to 2020 when the COVID-19 pandemic first broke out, while the environment faced by Chinese enterprises was not as good as before, they still responded to the stimulus policies of that year. Two years later, in 2022 when the world is recovering from the pandemic, China launched extremely stringent COVID-19-related preventive and control policies, which caused a major contraction of the country’s economy. However, this time is different from the past in that a large number of companies have not survived, and it would be difficult to adopt intensified means to stimulate small, medium, and micro-enterprises that lack confidence.
Final analysis conclusion:
How can China's grand narrative of stabilizing the economic market be effectively implemented in reality? Perhaps the answer can be found in the weak voice of a chain catering company: “We don’t expect any tax reduction, nor do we ask the bank to give us much loan. We only need to operate our business normally, allow dine-in, not a total lockdown merely because of an infection case or two”.
