Major financial data for the first quarter of this year, announced recently, have triggered mixed interpretations. Most believe that the figures are showing signs of stabilizing and the economic growth rate will witness a rebound. Some others, however, say that the foundation for an economic rebound is not yet solid, and the data should spark no over-optimism. Finance is at the core of the modern economy, and the performance of the financial sector may offer us some different perspectives to assess the trends of the economy.
Banks provided unprecedented support to the real economy, but worries that some credit funds remained unused still haunt.
In the first quarter, financial institutions extended new yuan loans amounting to 4.67 trillion yuan (about $718.6 billion), a record high. However, not all such loans went into the real economy. There were two trails of evidence to support this view. First, in the first quarter, new yuan loans to non-financial enterprises and government organs and institutions increased by 2.1 trillion yuan, while in urban fixed-asset investment, loans from banks only stood at 1.5 trillion yuan. In history, excluding the year 2009, however, the former was always smaller than the latter. Second, the loan demand index in the first quarter was at the lowest quarterly level since the index began to be published. This meant that corporate demands for loans among enterprises did not show any obvious uptick in the quarter. As for the record value of new loans, it was more related to banks at the supply side that, against the backdrop of smaller net interest margins, wanted to “drive up their profits through providing a bigger quantity of loans.”
The amount of “unused or excess” corporate funds would likely have gone into the financial and real estate markets, which in turn helped push up asset prices. The sharp surge in housing prices in the first-tier cities since the beginning of this year and the rally in stock indexes since March were probably correlated with this. However, whether or not the funds were actually used for production activities in the short term, it was obvious that the cash flows of enterprises were greatly improved. In the first quarter of 2009, the astronomical amount of loans directly led to the start of a fast rebound in economic growth from the second quarter that year, and it will be highly probable that the record amount of loans extended in the first quarter of this year will also help drive up the economic growth from the second quarter.
The rise in money supply has eased the deflation pressure, but leveraging in the entire economy is still high and rising.
In the first quarter, with joint influence of such factors as a bigger money multiplier, more loans and an eased decline in the funds outstanding for foreign exchange after cuts in reserve requirement ratios, growth in money supply showed a remarkable rebound compared with the same period of last year, thus greatly easing the deflation pressure. In the first three months, the consumer price index rose, the consecutive drops in the producer price index were eased, and the average reduction of the gross domestic product stood at 0.46%, reversing last year's trend of remaining in negative territory for four consecutive quarters. With a continuing rise in the growth rate of broad money supply (M2), the gap between the M2 and the nominal growth of GDP (also called money surplus) has widened. In 2015, the money surplus was 6.88%, the highest since 2009. In the first quarter, it showed a slight drop, but was still much higher than the recent normal level. Money supply, in another perspective, actually means the debt of the economy. When the growth in M2 far outpaces the GDP growth, it means that the overall debt leveraging level in the economy was still rising, and this runs counter to the “deleveraging” goals set for this year, aggravating the potential risks of the financial sector.
Suppressed by the capacity gluts and the imported deflationary pressure, the excessive money supply is unlikely to cause big deflation risks this year. However, irrational surges in some farm produce such as garlic, white gourd and green onion since the Spring Festival in February, in addition to the short supply of produce caused by lower temperature, were actually mainly driven by an eased supply of money, a situation in which massive amounts of funds sought investment opportunities and speculated in these farm products.
When the growth in narrow money supply M1 outpaced that of M2, it indicated that the investment sentiment of enterprises was improving, but a continuing deceleration in the growth of savings deposits indicated that residents' spending was rising.
The growth in the outstanding M1 rose continuously, and was remarkably faster than that of M2. This implied that the proportion of current account deposits by enterprises was rising, and the enterprises have become more optimistic about the prospects of future market demand and investment. By sub-index of manufacturing Purchasing Managers Index, purchasing prices in the first quarter rose, new orders started to rebound and the product inventory dropped to the lowest levels in history, while enterprises' desire to replenish their stocking showed an obvious uptick.
The main reason for a slower growth in M2 than that of M1, however, was the slowdown in the growth in residents' savings deposits. At the end of March, outstanding residents' savings deposits increased by 6.8% year-on-year, dropping by 2.2 percentage points from the same period in the previous year. The drop in the growth in residents' savings deposits was mainly attributed to the decline in the growth in residents' incomes. In the first three months, per-capita disposable income rose 8.7% year-on-year, a decline of 2.4 percentage points from a year earlier. Expenditure is usually decided by income. When the income level drops, it would be only natural that growth in residents' consumption would slow down. In the first quarter, the national per-capita consumption spending rose by 7.1% from a year earlier, and the growth rate was 0.2 percentage point lower than the same period of the previous year. Consumption has been a stabilizer inn the economic growth in the past few years, and if consumption growth slowed down by a big margin, it would be more difficult to stabilize economic growth.
Driven by factors such as unprecedented financing growth and increased investments by governments, the economy in the first quarter showed an obvious marginal improvement, and such an improvement accelerated in March, is expected to continue in April，and could maintain until June. The price paid for an economic rebound includes excessive money supply, a rising leverage level and structural aggravation, therefore, doubts remain if such improvements could be sustained for the long term. In view of an overall light inflationary pressure, particularly the fact that the actual economic growth in the first quarter was still on a downward trend, it is projected that the pattern of an eased monetary policy and credit supply will not change, and governmental investments (for example, special investment funds) will also continue to increase. And it is also estimated that more effective and powerful measures will be taken to stimulate and encourage private investments.
