Bad debt of Chinese banks dwindles
Beijing calls for "comprehensive green transformation" of China's economy. PBOC releases Q2 monetary policy report.
Our briefing on critical economic and financial developments in China as of Tuesday, 13 August, 2024:
The non-performing loans of Chinese banks posted a decline in the second quarter, while the balance of outstanding loans to small businesses leapt over 17% in year-on-year terms.
China accelerates the development of affordable, social housing in the first half.
The central government unveils what is reportedly the first systemic policy plan for the “comprehensive green transformation” of the Chinese economy.
The Chinese central bank has released its Q2 monetary policy report, highlighting efforts to cut financing costs for the real economy, as well as achieve optimisation of the financial system’s lending structure.
Dongbei University economist Zhou Tianyong points out that periods of reform in China’s recent history correspond to higher levels of innovation, as measured by growth in total factor productivity (TFP).
China is expected to make haste to tackle its risk-fraught fiscal system following Third Plenum in July.
Non-performing loans of Chinese banks post decline in Q2 2024, financial inclusion loans up 17.1% YoY
As of the end of second quarter, the non-performing loan (NPL) balance of Chinese commercial banks was 3.3 trillion yuan, for a decline of 27.2 billion yuan compared to the end of the preceding quarter, according to figures from the National Financial Regulatory Administration (NFRA).
The NPL ratio was 1.56%, for a decline of 0.03 percentage points.
The balance of outstanding financial inclusion loans to micro-and-small businesses made by Chinese banks at the end of the quarter was 78 trillion yuan. Of this amount, 32 trillion yuan consisted of loans beneath 10 million yuan.
China builds 1.128 million social homes in first half of 2024
The Ministry of Housing and Urban-Rural Development (MOHURD) points out that this figure is 66.2% of the 1.704 million in new social housing units scheduled for development in 2024.
China has accelerated efforts to expand the supply of affordable, social homes since the start of the year, following the release of the "Guidance Opinions on Planning and Construction of Social Housing" (关于规划建设保障性住房的指导意见) in August 2023.
Beijing debuts "systemic" plans for comprehensive green transformation of China's economy
The Central Committee of China's Communist Party and the State Council have jointly issued the "Opinions on Accelerating the Comprehensive Green Transition of Economic and Social Development" (关于加快经济社会发展全面绿色转型的意见).
Chinese state-owned media says the release of the Opinions marks the first set of "systemic arrangements" for driving the green transformation of China's economy.
The Opinions set the goals of:
By 2030: Creating an energy efficiency and environmental protection sector worth around 15 trillion yuan. Increasing non-fossil fuel energy consumption to around 25% of the total.
By 2035: The basic establishment of a green, low-carbon circular development economic system. The launch of a green, low-carbon path for economic and social development.
The Opinions also call for the use of "diverse green transition financing tools," with relevant measures including:
Encouraging banks to guide credit resources towards green transformation, on a foundation of rational risk assessment.
Allowing qualified local authorities to use government financial guarantee institutions to support green credit development.
Encouraging local governments to use multiple methods to reduce the cost of green bond financing.
Actively developing green equity financing, green financial leasing, green trusts and other financial tools.
The extension of the timeframe for low carbon and emissions reduction support instruments to the end of 2027.
The drafting of transitional financial standards.
Provision of financial support for the green, low-carbon transition of traditional industries.
Chinese central bank's Q2 monetary policy report highlights reductions in financing costs, structural optimisation of lending
The People's Bank of China (PBOC) - being the Chinese central bank - has just released its monetary policy execution report for the second quarter of 2024.
Key highlights include:
1. Maintenance of rational growth in credit.
PBOC highlighted the use of an array of tools including required reserve cuts, open market operations, medium-term lending facilities, as well as re-loans and rediscounting, to drive credit growth in the first half of 2024.
"[We have] maintained rationally ample liquidity, expedited balanced credit extension, rectified the empty circulation of funds and discretionary interest rate hikes, and raised the quality and effectiveness of service of the economy."
As of the end of June, outstanding total social finance and the M2 money supply posted year-on-year growth of 8.1% and 6.2% respectively. China saw the extension of 13.3 trillion yuan in new loans in the first half.
2. Efforts to reduce overall financing costs for the Chinese economy.
This included a 0.25 percentage point cut to re-loans and rediscounts for lending in support of agriculture and small business in January, as well as a 0.1 percentage point cut to the 7-day reverse repo in July.
PBOC said it would continue to drive the marketisation of deposit rates,and guide further declines in the benchmark loan prime rate (LPR).
As of June, the weighted average interest rate for new business loans was 3.63%, for a 0.32 percentage point reduction compared to the same period last year.
3. Guiding structural optimisation and adjustment of lending.
PBOC pointed in particular to its provision of 500 billion yuan in re-loans for science and tech innovation and technological upgrade, as well as 300 billion yuan in welfare housing re-loans.
The Chinese central bank is also loosening standards for financial inclusion micro-and-small loans and expanding the scope of financial tools to support carbon reductions.
PBOC reiterated its commitment to "effectively implementing various forms of existing structured monetary policy," that it uses to channel credit to desired sectors of the economy.
With regard to the property sector, PBOC pointed to its reduction of the minimum downpayment for personal home loans, alongside the cancellation of the floor for personal home loan rates.
As of the end of June, financial inclusion micro-and-small loans and medium-and-long term manufacturing sector loans saw YoY growth of 16.5% and 18.1% respectively, well ahead of growth in overall lending.
4. Maintenance of a stable exchange rate.
PBOC said that it had "upheld the decisive role of the market in the formation of exchange rates," as well as effectively employed the adjustment role of exchange rates with regard to the macro-economy and the balance of payments."
It also highlighted efforts to "maintain exchange flexibility, strengthen guidance of expectations and firmly prevent the risk of excess exchange rate movements."
5. Strengthening of risk prevention and disposal
PBOC pointed in particular to:
Improvements to financial risk surveys and assessments.
Steady disposal of risk in key regions and at key institutions.
Advancing the use of financial support to dispose of risk in relation to the debts of local government financing platforms in an orderly manner.
Strengthening the development of a financial stability protection system (金融稳定保障体系).
China needs greater reform to achieve innovation, raise total factor productivity: Zhou Tianyong
A leading Chinese economist says periods of accelerated reform in China correspond to increases in innovation, as measured by total factor productivity (TFP) growth.
"Only with overall, vigorous reform of the national economic system is it possible to achieve growth in innovative total factor productivity," wrote Zhou Tianyong (周天勇) from the Dongbei University of Finance and Economics in an online opinion piece.
Zhou points out that TFP flipped around from -8.35% and 0.31% in 1976 and 1977 at the tail end of the Cultural Revolution, to 4.89% in 1978 and 1.45% in 1979, when Deng assumed power and kicked off China’s reform and opening period.
During the halcyon period of reform in the mid-1980s, average TFP growth stood at 2.03% from 1982 to 1987. It then dipped into negative territory from 1988 to 1991, when inflation caused popular unrest that culminated in events in Tiananmen Square, and conservatives in the Communist Party briefly reasserted their influence.
TFP growth once again returned to 2.03% during the period from 1992 to 1997, as reform measures returned to the fore following Deng Xiaoping's Southern Tour, and the leadership of Jiang Zemin and Zhu Rongji.
China in a rush to tackle risk-fraught fiscal system following Third Plenum
Luo Zhiheng (罗志恒) from the Yuekai Securities Research Institute writes that the China will accelerate the process of dealing with its imbalanced and risk-fraught fiscal system, given the Third Plenum held in July sets the date of completing reform goals by 2029.
Analysts have long imputed the problem swith China's fiscal system to a severe imbalance between central and local government collections and expenditures.
This has prompted local governments to become highly leveraged, racking up "invisible debt" via investment platforms that also expose the Chinese banking system to risk.
Luo, however, highlights the role of declining tax revenues ever since the launch of China's supply-side structural measures in 2016.