Ma Jun, a member of the Monetary Policy Committee of the Central Bank of China, said at the seminar that financial risks are getting higher and a false economic boom is bound to trigger a bubble. China’s economic outlook is uncertain as the pneumonia Epidemic resumes in Wuhan.
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On January 26, Ma Jun, a member of the Monetary Policy Committee of China’s central bank and director of the Center for Finance and Development Studies at Tsinghua University in Beijing, said at a seminar hosted by the China Wealth Management 50 Forum (CWM50) that the leverage ratio of China’s economy is rising very fast, and in the first three quarters of 2020, China’s macro leverage ratio rose by 25 percentage points, the the highest rise since 2009. The sharp rise in leverage will naturally lead to future financial risks.
Ma Jun said that local governments are accustomed to cascading for their own performance, setting local GDP targets very high. This relies on borrowing money to invest to boost GDP than other methods of course easier, but therefore also increased the financial risk of hidden debt. It is generally believed that the initial period of high debt may create a “miracle” of economic prosperity, but in the long run, the false economic prosperity will certainly lead to a bubble economy.
The official practice of using GDP as a major indicator to examine the performance of local officials has long been widely criticized by public opinion. In order to cobble together figures of high economic growth, local officials have fudged and falsified, causing massive pollution of China’s rivers and lakes and serious harm to people’s health.
Ma Jun mentioned that bubbles have emerged in some areas. As an example, he cited that in 2020, several major Chinese stock market indices have risen sharply, close to 30%, and it is unlikely that such a bull market emerged in the face of a significant drop in economic growth, unrelated to the currency. In addition, housing prices in Shanghai and Shenzhen have risen considerably recently, and these are related to changes in liquidity and leverage.
Under the impact of the Wuhan pneumonia epidemic, China’s central bank implemented an ultra-loose monetary policy, adding nearly 20 trillion yuan (RMB, same below) in new RMB credit last year, a record high. However, the impact of slowing credit expansion on the economy will gradually emerge, with non-performing loans in the banking sector on the rise.
On January 12, China’s central bank released financial data and social financing (social finance) statistics for 2020, showing that RMB loans increased by 19.63 trillion yuan for the year, an increase of 2.82 trillion yuan year-on-year; the cumulative increase in social financing scale was 34.86 trillion yuan, 9.19 trillion yuan more than the previous year.
Among the sub-data, loans to residential households increased by 82.4 billion yuan, including short-term loans and medium- and long-term loans increased by 49.3 billion yuan and 43.2 billion yuan respectively, reflecting on the one hand the spread of the pneumonia epidemic in Wuhan and the weakening of people’s willingness to consume; on the other hand, it also reflects the tightening of real estate regulation dragging down people’s willingness to buy houses, and subsequent real estate sales and investment may be under pressure.
Credit social finance and broad money supply (M2) growth rate to maintain a high echo, M2 growth rate is higher, usually indicates that the market liquidity is abundant. As of the end of December 2020, M2 grew 10.1% year-on-year, 1.4 percentage points higher than a year earlier, and the growth rate of M2 remained in double-digit growth for 10 consecutive months.
From the structure of credit social finance, bank credit and government bonds were the main force supporting the high growth of social finance last year.
However, considering the spread of the pneumonia epidemic in Wuhan after the beginning of the year, the cloud of credit risk is not far away. Qu Qing, chief economist at Jianghai Securities, said the factor will continue to drag down the performance of the low-end service sector for some Time to come, delaying the pace of monetary policy exit.
The continuous decline in the growth rate of social financing stock also confirms the arrival of the turning point. According to Wang Qing, chief macro analyst of Orient Gold, on the whole, the financial data continued the downward momentum of the previous month, showing that “broad credit” has entered the ebb.
It is important to note that research institutions and academics have always believed that the above data contains water.
The loose monetary policy has brought risks to the financial system, and the pressure of non-performing rebound in China’s banking sector has suddenly increased.
Guo Shuqing, chairman of the China Banking Regulatory Commission, said in August last year that China’s banking sector is expected to dispose of 3.4 trillion yuan of non-performing loans in 2020 and will face a larger amount in 2021.
According to international financial industry standards and Chinese financial regulators’ regulatory requirements for the banking sector, Chinese banks will urgently need to inject large sums of money as reserves for non-performing loans to prevent systemic financial risks, and the difficulty in raising funds will add to the plight of the banking sector, whose profits have already plummeted during the Wuhan pneumonia outbreak.
Zhang Bin, a researcher at the Institute of World Economics and Politics of the Chinese Academy of Social Sciences, writes that by eliminating the unreasonable components behind high profitability, banks could concede nearly a trillion to the real economy sector, while being able to ease the pressure on local debt and reduce the risk of non-performing bank loans, and the efficiency of the financial sector would improve.
The massive reliance on bank loans for infrastructure investment has created a “win-win game” between local governments and commercial banks, with local governments receiving large amounts of capital and commercial banks reaping high profits. However, the so-called “win-win game” harbors huge systemic financial risks.
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