Prioritize Quality and Efficiency Over Quantity in Finance

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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 economyHowever, 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.

In today’s economic landscape, the state of project reserves within financial institutions is a crucial metric for gauging the vitality of the real economyUnfortunately, project reserves have dwindled alarminglyThese reserves essentially act as a reservoir for credit disbursement, where their liquidity and availability are vital for supporting economic projectsThe recent data from major eastern provinces reveals that project reserve amounts and numbers have both plummeted by over 20 percentage points from the first quarter to the second quarterSuch drastic changes underscore the contraction in loan demand from the real economy, signaling difficulties ahead for enterprises seeking financing for production expansion and technological upgrades

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As the availability of viable projects decreases, financial institutions face limitations in credit allocation, further implying a reduction in market investment and a hesitance from businesses to invest, which stifles new economic growth.

Furthermore, this decline in project reserves poses serious implications for the broader economic stability of the nationAs fewer quality projects are available, financial institutions will find it increasingly difficult to roll out credit, which not only stunts their operational growth but also mirrors a chilling desire to invest within the business landscapeThe reduction in project reserves signals a worrying trend that requires immediate attention from policymakers to address these constraints and facilitate a more vibrant investment environment across the board.

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 debtsThis, 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

Prioritize Quality and Efficiency Over Quantity in Finance

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