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Step by step, the money is going wild or will be determined in mid-July
**Summary**
Things are far from over. From banks and investment institutions to the National Development and Reform Commission, the Ministry of Industry and Information Technology, and other relevant departments, all are waiting for the next step in decision-making. On June 28, reports from various ministries and commissions revealed that the central bank is leading efforts with other agencies to study how to revitalize the stock of funds and guide financial support toward the real economy. A discussion paper on this topic, prepared during a State Council executive meeting, will be issued soon in the name of the State Council after collecting opinions from different sectors. A press conference will also be held to address these developments.
An official from the Finance and Development Department of the National Development and Reform Commission told the *Economic Observer* that relevant departments are following the State Council's guidance to further study and implement policies. Everyone now recognizes that excessive imbalance between finance and the real economy could trigger a U.S.-style financial crisis.
The Ministry of Industry and Information Technology is also waiting for the next steps. Officials from the Economic Operation Monitoring and Coordination Bureau and the Raw Materials Division mentioned they are expecting specific operational measures from the central bank and the China Banking Regulatory Commission. They emphasized that monetary policy alone isn’t enough to solve real economy issues, and the next step should involve fiscal and tax policies. The Ministry of Commerce is also waiting for exchange rate policies to support exports. At a time when the RMB exchange rate reached equilibrium, there was tension between the Ministry of Commerce and the central bank over further exchange rate reform.
The mid-July mid-year economic analysis meeting of the State Council is a key moment. An official from the Ministry of Industry and Information Technology said that all ministries are currently conducting mid-year research and analysis to prepare for the meeting. This meeting will determine where the “money shortage†from last week will be directed by policy. The official noted that after raising tolerance for economic slowdown, the decision to relax or tighten conditions would depend on the impact of the real economy on social employment. Since employment is stable, the policy of “revitalizing the stock of funds†will not be relaxed.
However, some officials worry that if financial policy fails to support the real economy, it could worsen asset bubbles. The ultimate cost would be continued decline in the real economy. Once China’s large real economy enters a downtrend, it would be very difficult to reverse.
**Revitalize the Adventure of the Brave**
In the week after the State Council executive meeting formally proposed the principle of “optimizing the allocation of financial resources, using incremental growth and revitalizing the stock,†Chinese commercial banks, capital markets, and the central bank jointly staged a game of jumping on a spring bed. This completed a stress test for each other. Ultimately, the central bank’s “concession†ended the market panic. Meanwhile, the China Banking Regulatory Commission is drafting a specific plan for adjusting the financial support structure, refining each of the discussion drafts. A document supporting financial restructuring of the economic structure, combining the opinions of the “three lines of meetings,†will be released soon.
As early as April, the China Banking Regulatory Commission issued guidance for the banking industry to serve the real economy, requiring banks to support domestic demand expansion, energy conservation, environmental protection, and agriculture in 2013. The State Council documents drafted by the CBRC align with this guidance.
In response to the central bank’s measures, officials close to the central bank told the *Economic Observer*: “The central bank’s main focus is not to directly release liquidity to the market but to provide window guidance to large banks with sufficient liquidity, allowing them to channel funds to small and medium-sized banks with tight capital. This helps stabilize high market interest rates. But it also shows that the central bank’s attitude is one of controlled and opportunistic regulation.â€
According to officials from the National Development and Reform Commission, “the central bank’s statement is only to stabilize market psychology and guide expectations. It is not really relaxing, and the determination to adjust the structure is clear.â€
The “revitalized stock†statement has triggered speculation that financial institutions may freeze liquidity. However, years of excess liquidity have led to widespread mismatches among banks.
Data shows that the scale of social financing in January–May 2013 was 9.11 trillion yuan, 3.12 trillion yuan higher than the same period last year. In May alone, social financing reached 1.19 trillion yuan. Among these, RMB loans increased by 667.4 billion yuan, up 125.8 billion yuan year-on-year. Entrusted loans rose by 196.7 billion yuan, an increase of 175.2 billion yuan, and trust loans increased by 99.2 billion yuan, up 43.5 billion yuan. These signs indicate that China has exceeded its planned increase at the start of the year, with much of the money not entering the real economy directly.
At the end of the first quarter of this year, China’s interbank assets reached 32 trillion yuan, accounting for 23% of total assets—an increase of 28% compared to the same period last year. The interbank market has become the best channel for financial institutions, including China’s four major banks, to expand their assets and achieve high returns. Recently, insurance funds have also joined the capital arbitrage game, redeeming money market funds to invest in bank wealth management products with higher returns.
Liao Qiang, a senior director at Standard & Poor’s Financial Institutions, believes it is difficult to predict the consequences of the current central bank policy. This will make commercial banks pay more attention to liquidity management and increase liquidity, which could lead to deleveraging of interbank and wealth management businesses. This process may reduce associated credit supply and result in bad debts for some high-risk companies reliant on shadow banking credit. Additionally, business deleveraging itself could reduce banks’ profitability opportunities.
Liao Qiang said: “If the central bank lacks sufficient communication with the market when tightening policies on interbank and wealth management businesses, and the duration is long, it could lead to rising credit interest rates in the real economy, which may have a negative impact on economic growth.†He believes that although the new policy is under pressure, phenomena such as deteriorating bank asset quality and profitability may occur, but it will not cause bank runs. He estimates that the bank’s NPL ratio may rise to 3% in 2013.
Zhu Haibin, chief economist at JPMorgan China, also warned about whether borrowing interest rates would increase. In Zhu Haibin’s view, once borrowing interest rates rise, it means monetary policy is actually tightening, which will put more pressure on the already weak real economy. Moreover, even if funds move from the financial sector to the physical sector, how to ensure that the funds reach the key sectors and industries the government hopes to support remains a thorny issue for policymakers.
**Distorted Credit Structure**
An authoritative figure close to the central bank explained the “revitalized stock†concept to the *Economic Observer*: “One is to adjust the credit structure. Currently, the loan balance of commercial banks is 60 trillion yuan. Each year, 20 trillion yuan is due, which can be used as a pivot for structural adjustment. In addition, asset securitization can be used to transfer credit assets and use new funds to support the real economy that should be supported. At the same time, internet finance can also improve efficiency.â€
Clearly, policymakers understand that moving “crowded money†from the financial system to the real economy is just the first step in regulation. Only by adjusting the distorted credit structure can they ultimately act on China’s economic restructuring, upgrading, and transformation.
Jia Kang, director of the Treasury Department of the Ministry of Finance, told the *Economic Observer* that China currently has more than 103 trillion yuan in broad money. Distributing such a large amount of money reasonably is not just about large enterprises and real estate; SMEs and emerging industries still face challenges.
From the perspective of investment data, real estate and infrastructure remain the main drivers of investment in the first half of the year. In the first five months, real estate investment grew by 20.6%, two percentage points higher than the same period last year. Infrastructure investment is also growing steadily, while industrial investment, representing production company growth, is declining.
Officials from the Economic Operation and Monitoring Coordination Bureau of the Ministry of Industry and Information Technology believe that in recent years, bank money has either been idle in the financial system or invested in large enterprises, real estate, and local government financing platforms. Most SMEs still lack access to funds or face high financing costs.
Many large companies have not used the money for direct investment. A banker noted that many state-owned enterprises have returned to the financial sector through trusts and other channels.
Xue Feng, director of the Finance Department of the Shaanxi Provincial Development and Reform Commission, feels that some banks prefer to lend to city investment companies rather than production companies. The bank explained to Xue Feng that the real economy is sluggish, and many enterprises are not profitable. It is better to invest in city investment companies, as this can be seen as quasi-government debt, which is generally safe.
But the danger is that credit risk is accumulating in these areas. Zhu Haibin believes that the debt ratio of local governments and enterprises has risen sharply in recent years due to rapid credit growth. Deleveraging of the financial system will increase repayment pressure, potentially leading to a decline in credit asset quality and an increase in non-performing assets.
Zhu Haibin said: “In this sense, the turmoil in the money market last week may be the beginning, not the end, of financial system turmoil in the next few years.â€
**The Bottom Line of Policy Pressure**
Officials from the Economic Operation and Monitoring Coordination Bureau of the Ministry of Industry and Information Technology said that although the central government has emphasized support for SMEs and the real economy in recent years, in fact, compared to the huge lending scale of banks, enterprises have received very little. The revitalization of the stock aims to bring money to enterprises.
A person in charge of the banking regulatory bureau said to the *Economic Observer*: “Now, banks clearly know what should be withdrawn, but they are unsure which areas should be entered, because some areas know they should be supported, but the risks are relatively high.â€
Science and technology enterprises, affordable housing, cultural and creative industries, and small and micro enterprises are considered potential investment areas after credit structure adjustments. Tan Weixian, deputy director of the Shanghai Banking Regulatory Bureau, told the *Economic Observer*: “Three years ago, Shanghai’s banking industry was focused on real estate lending. In the past two years, with the adjustment of Shanghai’s industrial structure, the banking industry has also adapted to this change, increasing support for small and micro enterprises, affordable housing, and emerging industries aligned with transformational development.â€
Yu Shengfa, president of Hangzhou Bank, said that he pays attention to supporting technology-based enterprises and modern service industries. “Technology investment is essential for enterprise transformation and upgrading. We have established a specialized sub-branch for technology-based SMEs—Technology Sub-branch. In the service industry, the proportion of customers in the commerce and trade circulation industry in our bank’s credit customers has increased year by year.â€
But adjusting the credit structure remains a big challenge for banks. The aforementioned central bankers said: “Industries and companies with high risks can be priced higher. However, the pricing power of commercial banks and other risk control capabilities have not improved correspondingly. They can only continue to do some seemingly stable financing platforms, real estate projects, etc.â€
Relevant persons from the Ningbo Banking Regulatory Bureau revealed to the *Economic Observer* that it is very difficult for banks to meet the “two no less than†targets for small and micro enterprises in 2013. There are reasons for the large base, as well as insufficient credit demand from small and micro enterprises, and problems such as poor quality of these enterprises. In Ningbo, banks support more projects under construction. For example, CCB Ningbo Branch supported 173 ongoing projects in Ningbo, with a planned support of 67 billion yuan.
Yang Ping, deputy director of the Investment Research Institute of the National Development and Reform Commission, said that China’s current industry growth rate is low, and overcapacity in the industrial sector is more serious. The demand for these companies’ own loans is not strong. “Revitalizing the stock†is undoubtedly necessary to direct money into the real economy, but the government needs to point out a relatively clear new growth point for loans so that the market can see confidence and let the bank vote.â€
Authorities close to the central bank told the *Economic Observer* that “in fact, whether it is the money market or the credit market, there is no shortage of funds, but the lack of effective credit demand. The central bank should insist on not releasing water this time. Power is to hope that the Chinese economy will go back the old road. This is not necessary. We must be brave in adjusting, or we will miss too many opportunities.â€
According to officials from the Economic Operation and Monitoring Coordination Bureau of the Ministry of Industry and Information Technology, the bottom line of high-level tolerance for the real economy is that there is no big problem in employment. This is the last step in the decline of the real economy. The central bank’s officials said that this time the attitude of the State Council and the central bank is still relatively firm, hoping to adjust to the end. If there is market volatility in the middle, which may lead to systemic risks, the central bank will take certain measures. Overall, this is a dynamic process. A balance is reached in the game. The central bank does not want to take the old road. This time, the State Council has this determination.