Beijing’s Loose Monetary Policy Fails to Boost China’s Economy
News Analysis
The People’s Bank of China (PBOC) published recently that December 2022 saw a decline in private financing, which was lower than market forecasts.
Individual deposits increased by 80 percent over the past year, while personal loans continued to decline. As the price scissors showed, both M1 and M2 growth curves have been in decline. This indicates that there is a growing gap between M1 & M2.
This was expansionary monetary policy In 2022. Experts said that the loose monetary policy did not create expansionary credit. This means that private finance and consumer consumption did not increase as expected. However, officials from the Chinese Communist Party (CCP), have tried various ways to guarantee liquidity. But, pump-priming appears to have had no effect on economic growth.
Investment and consumption fall
Jan. 10: The PBOC issued a series reports including the Financial Statistics Report (2022), Report of Aggregate Financial Arrangements to the Real Economy Flow (222) and Report of Aggregate Financial Arrangements to the Real Economy Stock (222). According to these reports the balance of broad cash supply (M2) was 266.43 trillion yuan, or about $39.34 trillion. It has increased at a rate of 11.8 per cent year over year.
The balance of the money supply was 67.17 trillion Yuan (about $9.92 Trillion), with a growth rate 3.7 percent. The currency in circulation (M0), which was approximately 10.47 trillion yuan, grew by 15.3 percent each year. In 2022, there was a net money injection in the amount of 1.39 trillion Yuan (around $205.3 billion).
The growth of M2 has revealed that there would have been a high potential for financing redemption alongside exponential growth in personal deposits. M1 had a lower growth rate due to the lackluster real estate sales, which slowed down industrial increment. Economic vitality was also low. For fixed-term investment, negligible business capital was used.
The growth rate for M1 was greater than that of M2. Comparing November, the gap between M2 price scissors and M1 grew by 0.3 percent to 8.1%. As the price scissors revealed, there was an increasing discrepancy in M1 and M2. It showed that cash flow was limited, business activities were affected, and customers saved more than they spent. (The difference between growth rates M2 & M1 can be used to measure capital activity.
In 2021, household debts increased by 7.92 trillionyuan (about 1.17 trillion). Short-term loans increased with 1.84 trillionyuan (about $271.8billion), while medium and long-term loan increased with 6.08 trillionyuan (6.898.1 billion).
In 2022, household debts increased by 3.83 trillionyuan (5565.7 billion), short-term loan increased by 1.08 trillionyuan (159.5 billion), and medium and long-term borrowing increased by 2.75 billion yuan (406.6.2 billion). As a result, household loans that were newly added dropped by 52 percent and those that were newly added to long-term and medium-term loans fell by 54 percent. It also affected the real estate market. A lot fewer people are now buying houses with loans.
In 2021, household deposits amounted to 9.9 trillion yuan (approximately $1.46 Trillion). In 2022, it was 17.84 trillion Yuan (or about $2.64 trillion), an 80.2 percent increase over the previous year. Personal deposits almost doubled in 2022 while loans fell by more than half. It was clear that consumers are less confident in economic growth and they are more reluctant to invest and consume.
Wei Jianing, a Chinese economist, stated that the slowdown in long-term economic growth was a serious threat to national economic safety during a speech to the China Financial Security Forum Dec. 24, 2022. Although China’s State Council held an emergency conference of 100,000 representatives at the end of May 2022, followed by “Six Aspects,” “Thirty-Three Sets of Measures,” And “Plan of Twelve Trillion Yuan Economic Stabilization,” The economist stated, “No effect has been seen on economic growth.”
A decline in aggregate private finance
CCP released official data indicating that the real balance is a combination of aggregate private and public financing. economy At the end of 2022, it was 344.21 trillion yuan (about $58.8 trillion), an increase of 9.6 per cent year-over–year. In 2022, the cumulative rise in aggregate private financing was 32.01 trillion yuan (4.73 trillion), which is 668.9 million yuan (698.8 billion) higher than the previous years. The aggregate private financing grew by 1.31 trillion Yuan (about $193.5 million) in December 2022. This was about 1.05 trillion Yuan (about $155.1 million) less than December 2021, and 680 billion Yuan (about $100.4billion) less than November 2022. This was a sign that the financing system had been declining.
The net financing of corporate bonds fell sharply by 270.9 billion yuan, or about $40 billion. It was 487.6 million yuan ($72 billion) less than December 2021. The decline is related to the withdrawal of the net value of financial products—that is, financial products got redeemed and converted into deposits; however, bonds were sold off, which resulted in canceling or terminating new bonds.
The December 2022 reduction in short-term loans was 41.6 billion yuan, or $6.15 billion. However, medium- and long term loans were increased by 1.2 trillion Yuan (about $177.3 Billion), with the majority of borrowers coming from real estate. According to this, official policies are not able to increase domestic demand for real property.
Xiong Yuan (chief economist at Guosheng Securities) stated that loose monetary policies throughout 2022 didn’t bring about the desired increase in credit. However, overall the growth rate for aggregate private financing has slowed slightly, with an upside-down “U” curve. Treasury bonds, financial instruments based on policy, and equipment refinancing are the key drivers.
PMI and Non-Manufacturing Business Activity Index fall
From the previous month, the production and outlook levels of the manufacturing sector have dropped. According to China’s National Bureau of Statistics (NBS), in December 2022, the purchasing manager index (PMI) was 47.0 percent, one percentage point lower than the previous month and lower than the critical point. The critical point is also below five subindexes of PMI.
- The output’s weight was 44.6 percent. This is 3.2 percentage points less than the previous month. It indicates that manufacturing output has fallen.
- The new order weight was 43.9 percent. This is 2.5 percentage points less than the previous month. It indicates that there has been a decrease in manufacturing market demand.
- The employment weight was 44.8 %, which is 2.6 percentage points less than the previous month. This indicates that the manufacturing employment rate has declined.
- The stock of inventories weighed 47.1 percent. That’s 0.4 percentage point higher than the previous months, which indicates that the inventories stock fell.
- The supplier delivery time weight was 40.1 percent. This is 6.6 percentage points less than the previous month. It indicates that raw material suppliers were delayed in their delivery times.
The December 2022 weight of non-manufacturing activity was 41.6%. This is a decrease by 5.1 percentage points over the previous month. It also fell below the critical point and the production and outlook levels of non-manufacturing decreased. The weights for business activities including transport, accommodation and catering were lower than 35.0%.
Prospect Index of Real Estate Drops to its Lowest Level
According to data released by NBS on Jan. 17, 2022’s net sales area for commercial property was 1.358 billion sq. m, which is a 24.3 percent decrease year-over year. The sales volume for commercial property was 13.33 trillion Yuan (roughly $1.97 trillion), which is a 26.7 percent decrease year-over year. The national average commercial property rate was 10.185 yuan per square meter (about $1,501), a decrease of 2 percent compared to the previous month.
The national real estate investment was 13.29 trillion Yuan (about $1.96 Trillion) in 2022. This represented a 10% drop from the previous year. It was also the first historic decline. Nationally, the area of land purchased decreased by 53.4 percent over the past year. If the land acquisitions supported by local urban investment programs were not included, the real situation in land acquisition would have been worse.
The area under construction, newly started and as-constructed were all reduced. In particular, the area of newly begun construction was down by 40% year-over year.
In 2022, the investment in real estate amounted to 14.9 trillion yuan (about $2.2 trillion), 25.9 percent lower than the previous year’s. The prospect index for real estate dropped to 94.35% between December 2022 and now, which is the lowest point in recent years. It indicated that there was very little liquidity in the sector.
“The inventory destocking happened in 2015 when the property investment was also under pressure. However, the investment still increased by 1.0 percent at that time. Thus, the housing market has been facing an unprecedented challenge in 2022,” According to Sina Finance China’s Chinese news portal Sina Finance China Li Yujia was the chief researcher of Center for Housing Policy Studies of Urban and Rural Planning and Design Institute of Guangdong Province.
Cric Research Center released a January 2 report that showed that the overall sales performance for the real estate sector in 2022 was down to 39%. Real estate investment fell to its lowest point in 2022. Nearly 40 percent of top 100 realty companies stopped investing throughout the year.
The report showed that almost 90 percent of the 100 largest real estate companies experienced a decrease in cumulative performance over the past year. Thirty-six companies saw a decrease of more than 50 percent, and 32 companies saw a drop of 20–50 percent.
Analysis: China’s Loose Monetary Policy Fails to Become Easy Credit
The M2 money supply grew at a faster rate than aggregate private financing from April 2022 to December 2022. The M2-aggregate price scissors for private financing once provoked heated debate about the need to be vigilant. “liquidity traps,” Therefore, the transmission mechanism of loose money policy was blocked and easy credit was not able to become easy money.
Xia Lei (chief economist at Sealand Securities Co.) published an article on Jan. 13 stating that aggregate private financing growth had been lower than M2 over nine months to December 2022. Although the price scissors gap decreased slightly to 2.2 percent during the month, it remains high and prevents the transfer of large amounts of money to broad credit.
Chen Fang, a finance expert, stated at the 2023 Spring Festival Forum, Jan. 3 that the monetary environment had improved in 2022 following two rounds of overall reductions of the reserve requirement ratio (April and November) and two rounds of reductions of the medium term lending facility (January and August).
The current problem is that easy cash cannot increase easy credit because of the constantly widening gap in price-scissors between M1 money supply and M2 money supply.
David Chu is a journalist based in London. He has worked in the financial industry for over 30 years, in major cities across China, as well as abroad, such South Korea, Thailand and other Southeast Asian nations. He is the son of a traditional Chinese medicine family and has an extensive background in ancient Chinese literature.
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