The recent financial indicators have painted a complex picture of the Chinese economy as it navigates through a landscape marked by both stability and significant challengesFor the past couple of months, the growth rate of the country's broad money supply (M2) has shown signs of stabilization, and the figures for social financing and new renminbi loans in August have surpassed market expectationsThis trend suggests that despite the underlying structural transitions within the economy, financial data remains robust, providing steadfast support to the real economy.

The slowdown in financial growth this year can be attributed to several factorsThe first and foremost is the relatively weak demand for loans within the real economySurveys released by the central bank reveal a stark decline in the loan demand index, which fell from 71.6% in the first quarter to just 55.1% in the second quarter—marking the lowest level since records began in 2004. In previous years, loan demand in China was strong, driven largely by a booming economy

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However, the current drop in the loan demand index now points to a shift from a supply-side constraint to a demand-side constraint within the credit growth framework.

Another dimension of the financial dilemma arises from the short-term effects of "squeezing out the excess." The regulatory measures aimed at curtailing arbitrary interest supplement practices aim to reduce the space for capital arbitrage, thus compelling enterprises to redirect idle funds towards settling overdue debts

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This, in turn, is expected to enhance capital turnover efficiencyEvidence from the central bank's entrepreneur survey in the second quarter indicates an uptick in the capital turnover index and receivables collection index, both climbing over 60%. These improvements suggest that the financial sector is indeed providing substantive support post-adjustment, manifesting in tangible benefits for the real economy.

Concurrently, changes in deposit structures have also come to lightThe narrow measure of money supply (M1), which represents demand deposits, has been influenced by various short-term factors including the crackdown on arbitrary interest supplements and a shift towards wealth management productsAlthough the total volume of deposits continues to rise overall, the segmentation indicates a concerning trend where demand deposits—especially those from enterprises—are experiencing a diversion into fixed deposits or other investment vehicles.

In this context, it's crucial to acknowledge the evolving relationship between the money supply metrics and real economic activities

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As China's financial systems modernize, the correlation between monetary aggregates and economic performances has weakenedInfluencing factors include changes in industrial structures, the deepening of financial markets, and a dilution of the marginal utility of moneyIt becomes apparent that if a large amount of money sits idle without being utilized for consumption or investment, the stimulating effect of monetary supply on economic growth diminishes significantly.

Thus, simply monitoring the growth rate of monetary aggregates is insufficient for a comprehensive understanding of how effectively the financial system is supporting the real economyPresently, China is in the midst of a transformation aimed at higher quality development—one that necessitates a shift in the growth of credit from being supply-driven to demand-drivenIn this regard, chasing after financial quantity alone is not only challenging but could yield counterproductive effects such as capital idleness