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

In the Chinese credit market, a common pattern is observed where June is typically a robust month for credit extension, principally due to semiannual reviews and market rankings, followed by a sharp contraction in July. For example, in June 2024, new loans amounted to 2.13 trillion yuan, dropping significantly to 260 billion yuan in July. Similar trends are seen in previous years, such as June 2023’s 3.05 trillion yuan plunging to 350 billion yuan in July. This year, June’s new loans were 2.24 trillion yuan, yet the July result was even worse than expected, with a decrease of 50 billion yuan (a negative credit growth), and year-over-year growth falling below 7% for the first time, registering just 6.9%[para. 1].

Previously, aggregate social financing had experienced a notable decline in April of last year, which led the authors to identify a “financial inflection point.” This term denotes a sustained decline in credit growth, a trend confirmed after six months of monitoring. The negative growth in July 2024, after accounting for usual seasonal fluctuations, further underscores this turning point[para. 2].

Another hallmark of this “inflection point” is the increasingly strong connection between social financing conditions and government financing conditions. In alignment with the “moderately accommodative” monetary policy affirmed at last year’s Central Economic Work Conference, government departments have driven much of the expansion in social financing. By the end of July, government sector financing had surged to an annualized pace of 16.2 trillion yuan, while non-government sector financing stayed stable at 21 trillion yuan. Overall, aggregate social financing hit 37.3 trillion yuan per year, showing a 5 trillion yuan increase compared to both last year and the start of this year, entirely attributable to government efforts[para. 3].

Such stability in non-government sector credit combined with rising government funding is in line with expectations during an inflection period, with underlying changes in the aggregate and structure of the economy serving as fundamental drivers[para. 4].

Significantly, there have been clear signs of improvement in the non-government sector, largely influenced by ongoing policy effects. For instance, household sentiment toward capital markets has warmed considerably. In July, an increase of over 2 trillion yuan in household deposits at non-bank financial institutions was recorded, mainly due to funds flowing into the capital market. The ratio of household demand deposits to A-share market capitalization fell below 0.4 at the end of July, down from 0.45 at the start of the year, illustrating improved investor confidence as the stock index rises[para. 5].

Historically, this ratio moves inversely with the A-share market: it stood at 0.26 in May 2015, coinciding with the market’s previous peak[para. 6].

Additionally, corporate cash flow has strengthened. Under incremental policies, growth in corporate demand deposits improved from -5 trillion yuan per year in Q3 2023 to 1 trillion yuan per year by July 2024, indicating a 6 trillion yuan net improvement over three quarters, matching the rise in government sector financing. Policy actions such as debt resolution and arrears payment have contributed to this improvement[para. 7].

In August, optimism continued in the A-share market with trading volumes exceeding 2.8 trillion yuan, Evergrande’s delisting signifying the nearing end of its market-clearing process, and the Sino-U.S. tariff truce extension, all contributing to market stabilization[para. 8].

Despite weak July data, both internal and external factors indicate a trend towards micro-level expectation repair. The July Politburo meeting supported further enhancement of the capital market and more efficient government bond utilization, reinforcing a favorable policy environment[para. 9].

With market expectations and sentiment stabilizing, aligning micro and macro policies could solidify the process toward the “four stabilities”—macroeconomic, financial, employment, and market stability[para. 10].