• Sun
  • Dec 21, 2014
  • Updated: 3:10pm

China eases credit flow to fight slowdown

Money supply rises 13.4 per cent in May amid solid increase in new loans after Beijing urges banks to support smaller and rural businesses

PUBLISHED : Friday, 13 June, 2014, 5:57am
UPDATED : Friday, 13 June, 2014, 5:57am

The mainland authorities appear to have boosted credit supply amid slowdown fears, with data showing yesterday that banks extended more loans last month than in April.

New loans amounted to 870.8 billion yuan (HK$1.08 trillion), compared with 774.7 billion yuan in April, the People's Bank of China said.

The broad gauge of money supply, M2, rose 13.4 per cent from a year earlier, faster than the 13.2 per cent gain in April.

The increase in credit, although still moderate, comes on the heels of the government asking banks to step up support for the country's vulnerable sectors, such as smaller and rural businesses.

Beijing has, however, refrained from wider easing to avoid fuelling financial risks.

At a recent meeting, Premier Li Keqiang warned provincial leaders about the dangers of missing the economic growth target, set at "about 7.5 per cent" for this year, urging them to ensure central policies are well executed. He also asked ministries to tackle problems such as slowing investment and tight credit.

The economy expanded 7.4 per cent in the first quarter from a year earlier, the slowest in six quarters.

The National Bureau of Statistics is due to publish today new economic data for last month, including those for industrial output and fixed-asset investment.

"The broader picture is that although government efforts have helped stabilise credit growth, policymakers have so far avoided an across-the-board loosening," said Julian Evans-Pritchard, an economist at Capital Economics.

While more moderate credit increases were likely, he said, "We see no great need or desire among policymakers to drive a marked rebound in broad credit growth."

The government has been adding liquidity gradually in recent months, including cutting select banks' reserve requirement ratios to inject more funds into the banking system.

The central bank also offered 300 billion yuan of relending to the China Development Bank to redevelop slum areas, according to media reports.

Meanwhile, the Ministry of Finance urged local governments to accelerate fiscal spending so that more projects could be launched. National fiscal expenditure last month jumped 24.6 per cent from a year earlier.

Economists expect the policy easing will help stabilise growth in the third quarter, although some say this quarter's performance may still slow from the previous three months.

Barclays Capital said it saw "some upside risk" to its growth forecast of 7.2 per cent for this year, citing the monetary easing steps taken so far and those likely to come in the coming months.

Aggregate financing, which includes loans issued through non-banking channels, fell to 1.4 trillion yuan last month from 1.55 trillion yuan in April, as regulators retained tight control over shadow-banking lending.

Analysts say the PBOC may have injected liquidity pre-emptively in a bid to prevent another liquidity crunch hitting the banking system as it did in June last year. Aggregate financing stood at 1.19 trillion yuan in May last year.


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For a very long time, China’s highly profitable banking industry has been relying on the well-protected interest-differential mode of operation, created through both low deposit rates and high lending rates.
This has prevented the banks from developing a real core-competitiveness, and has sacrificed the interest of the bank depositors and reduced the net profits of the borrowing enterprises.
This has been detrimental to the persistent economic growth of the economy and has led to a higher degree of income inequality.
According to the annual reports, the total revenue of the country’s listed banks amounted to some 50 to 60 % of the total revenue of all the listed companies in the stock market.
(From ‘The Truth of The Economy’ by ZuoXiaoLei)
China’s present policy of micro-stimulus and targeted RRR cut gives the country’s SMEs a good opportunity to expand their businesses.
But to obtain the trust of the banks and other external investors, the SMEs also need to improve their administrative structures, rather than simply yelling for more loans.
Some of them should change from a simple ‘one-person shop’ to a more sophisticated one, which is governed by different tiers of management.
In particular, they should consider the possibility of cooperating with each other, say by transferring part of their stock right.
With a bigger enterprise as one of the shareholders, it becomes easier to obtain loans from the banks.
An example is HaiDiLao, a hotpot restaurant in China.
It changed from a single shop to a chain of shops, and eventually sought to list in the stock market.
(Chinese readers: ****economy.caijing.com.cn/2014-06-15/114263935.html)
After reading the article ‘Guest Post: illuminating China’s financial shadows’, written by Stephen Green, Standard Chartered Bank,
it seems that, concerning China’s shadow banking market, we may put our heart at ease.
Well, a banker is usually an optimistic lot, especially concerning the financial development of China, for obvious reasons.
But this time, the author seems to have ignored the latest development in China’s shadow banking market, by just concentrating on those trust and wealth management products and ignoring the latest development there.
According to the following Chinese article,
since 2013, interbank lending (同業借貸業務) has become the latest form of regulatory arbitrage (situation where companies take advantage of loopholes in order to avoid unprofitable regulations).
Originally, bank A holds the beneficial right of trust ((信托受益权) of the trust company, X.
Bank A now transfers the beneficial right of trust to bank B, and promises to buy it back 6 months later.
This way, bank A can turn the original non-standard asset (非標資產) into an interbank asset (同業資產).
As a result, bank A needs to make less provision against risks, and the occupied capital will also be less than before, thereby extending its capacity to lend.
What’s more, this ‘sell-and-repurchase’ arrangement enables bank A to artificially increase its amount of deposits and evade the regulation of loan-deposit ratio.
Bank B can simply do the same, by selling its bills or the beneficial right of trust of the trust company, Y, to bank A.
The interbank assets of the 16 listed banks increased from 5 trillion yuan in 2010 to 18 trillion yuan right now.
For some banks, their interbank assets are as much as 25% of their total banking assets.
This development in the shadow banking market creates another potential tipping point so far as the country’s systemic risk is concerned.
By design, bank A and bank B can sell to each other the same yuan value of beneficial right of trust and end up paying in effect nothing, but gain all the benefits mentioned above --- a free lunch as a result.
The same can be done by all the other banks in unison.
But don't think that the no-free-lunch postulate can so easily be refuted.
Someone else somewhere someday in the future will have to pay for it, one way or the other --- there is no easy escape.
It is said that China Banking Regulatory Commission is going to issue document no. 9 in February next year to deal with this problem.
Of couse the music of the cat-and-mouse game will go on and on in the foreseeable future.
The under-development of the bond market in China has now become a serious bottleneck to the country's further economic development.
The economy can no longer rely solely on the banking system as the main source of fund in the market.
The present development of the municipal bond market is a step in the right direction.
Owing to her biggest bond market in the world, the US has been able to continue her economic development, maintain the status of the US dollar as the world's global currency, fund the financial need of her government, and survive the last Great Crisis.
Conversely, the lack of a big and deep bond market had led to the Latin Debt Crisis, the Asian Economic Crisis, and the European Debt Crisis.
(Chinese readers : ****comments.caijing.com.cn/2014-06-12/114257045.html)
This article should be read by Hong Kong's conservative finance officials as well.
With a relatively small internal market, and without big enough bond, bill, and foreign exchange markets of her own, together with too tight financial market regulations, high financial-market transaction costs, and too high finance-related tax rates, Japan had failed to successfully internationalise the yen in her heyday.
(From 'A Study on The Conditions of RMB internationlization')
Luckily, China is big and populous enough to potentially develop a deep and sophisticated bond market in the country.
Similarly, the Asian countries should unite to protect each other, at least economically, by developing a big and deep Asian Bond Market of her own, so as not to rely on the hot money from the western countries for their need for fund.
If not, when the western hot money comes and goes, comes and goes, the countries will experience boom and bust, boom and bust --- a never-ending story.
The coming Asian Infrastructure Investment Bank may one day evolve into an organization with the ability to become a lender of last resort.
This way, the Asian countries also have no need to accumulate too much foreign reserves, which most probably are used to buy back the treasuries of the western countries.
Even worse, the western countries simply utilize the cheap fund supplied by the Asian countries, and invest back in the same countries, thereby utilizing their cheap labour to earn a much higher rate of return than their original cost of fund.
The rule of thumb is always to grasp one's own destiny, and not to rely on other people, especially the IMF.
And this is also one of the reasons why China has to rebalance her economy toward one led by domestic consumption.
When China's economy was growing quickly a few years ago, with more than 10% GDP annual growth rate year in and year out, the country's sole reliance on indirect financing as a method of raising fund (the bank loans in particular) did not pose a problem for the economy.
But now, when the economic growth slows down, part of the industries starts to default their loans.
This adversely affects the healthiness of the balance sheets of the banks.
The problem is made worse by the development of the precarious Ponzi-scheme-like shadow banking market (which is also funded by foreign hot money, due to the interest rate differential and the one-way-bet yuan revaluation).
Those inefficient and loss-making zombie businesses continue to stay in the market through the help of the banks, the shadow banking market, and the government,
and so go on occupying part of the valuable productive resources and deferring the overall upgrade of the efficiency and production methods of the whole economy.
They are essentially repeating the Japanese Disease.
This is the reason why China cannot climb out of the excess-capacity trap,
and relies on persistent leveraging-up to maintain the present mode of production, which causes a great degree of distortion.
(From the Chinese book ‘China Economic Microtrends’)
This is why the method of no-matter-what across-the-board RRR reduction is not recommended for China at present.
(iii) As a financial reform, allow the set-up of privately-run banks which specifically serve the needs of the country’s small and micro businesses (including the innovative technological companies and the service industries).
(iv) Targeted relending operations to support small and medium private enterprises and the service industries.
Here the service industries also include the two ends of the manufacturing industries --- R&D and Design at one end, Conduit Management and After-Sale Services at the other (according to the Chinese scholar Wu Jing Lian).
(Relending operations are a monetary-policy tool unique to China whereby the central bank lends to commercial banks, which then lend the money to targeted customers.)
(v) Targeted expansionary monetary policies.
Like targeted RRR cut.
(vi) Across-the-board expansionary monetary policies.
Like across-the-board RRR reduction.
To my knowledge, China’s present policy priority should partly be as follows:
(i) Real structural and institutional reforms.
Difficult to do, but cannot be avoided, especially for the long-run health of the country.
(ii) Expansionary fiscal policy (using government budget deficits to offset the country’s excess private savings to prevent the GDP from falling).
More (targeted) government spending and less taxation, which means a smaller central government surplus budget or a larger central government deficit budget, to be financed by her rich fiscal reserves).
Now GDP = C + I + G + (X-M).
To sustain GDP, C cannot be depended upon, especially in the short run.
Increasing I through more money printing means more over-capacities and bad loans, especially if the new money ultimately spirals back into the black hole of the local government’s financing vehicles, the property market, and the inefficient SOEs.
Increase in X depends on the quicker recovery of the foreign markets --- not so optimistic really.
The proper way out is to increase G (or to increase C & I through tax reduction) --- targeted of course.




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