Commentary: China’s Economy Undergoes a Six Trillion Yuan Repair

Credit extension in China typically sees June as a “big month” due to semiannual reviews and market rankings, followed by a significant drop in July. For instance, new loans in June 2024 reached 2.13 trillion yuan, falling sharply to 260 billion yuan in July. Similar patterns were observed in 2023 with 3.05 trillion yuan in June and 350 billion yuan in July, and in 2022 with 2.24 trillion yuan in June. However, July 2024 saw an even sharper decline, with credit growth turning negative at -50 billion yuan (about -$6.9 billion) and year-over-year growth dropping to 6.9%, below market expectations and marking the first time it fell under 7% [para. 1].

Before this, aggregate social financing experienced a single-month decline in April of the previous year, which was interpreted as a “financial inflection point,” characterized by a continued decline in credit growth even after accounting for seasonality. July’s credit conditions reflect this ongoing inflection, reinforcing the negative trend [para. 2].

A significant marker of this inflection point is that movements in social financing have become increasingly tied to government financing. The Central Economic Work Conference at the end of last year set out a “moderately accommodative” monetary policy targeting easier social financing conditions, largely driven by increased government sector financing. By the end of July, annualized government sector financing rose to 16.2 trillion yuan, contributing all of the 5 trillion yuan increase in total social financing from the previous year, while non-government financing remained steady at 21 trillion yuan [para. 3]. Thus, in this phase, stability in non-government sector credit and the rise in government financing are expected outcomes, determined by structural changes in the economy [para. 4].

Nonetheless, there are encouraging signs of recovery in the non-government sector due to sustained policy interventions [para. 5]. First, household sentiment toward the capital market is improving: an over 2 trillion yuan increase in bank deposits in July was driven by shifts into the capital market. The ratio of household deposits to total A-share market capitalization declined from 0.45 at the start of the year to below 0.4 by July, indicating improved household sentiment as stock indices rise (the historic low for this ratio is 0.2, while the previous peak was 0.26 in May 2015 as the Wind All A Index hit a record high) [para. 6][para. 7].

Corporate cash flow has also improved, with corporate demand deposits rising from an average decrease of -5 trillion yuan per year last year’s third quarter to an increase of 1 trillion yuan per year as of July 2024. This 6 trillion yuan net improvement matches the increase in government financing, indicating effective policy measures like debt resolution and clearing payment arrears are having the intended effect [para. 8].

August began with continued optimism in the A-share market, exemplified by trading volumes surpassing 2.8 trillion yuan on August 18. Evergrande’s announced delisting from the Hong Kong Stock Exchange indicates the property market adjustment may be reaching a turning point, while a 90-day extension of the Sino-U.S. tariff truce also supports optimism [para. 9].

Despite some deterioration in July data, shifts in both internal and external factors point to improving microeconomic expectations. Policy initiatives, such as those highlighted in the July Politburo meeting, aim to further stabilize and invigorate the capital market and enhance Government bond effectiveness, fostering continued repair at the micro level [para. 10].

If micro-level sentiment and behavior continue aligning with macro-policy objectives, the stabilization process can be consolidated, supporting the attainment of the “four stabilities” [para. 11]. [para. 12][para. 13] are disclaimers, noting that the opinions are personal.