Structural Changes in Financing

The recent decline in social financing and M2 growth rates signifies a significant shift as the economy transitions towards a higher quality phaseThis change reflects alterations in the main driving forces of economic recovery, where the sensitivity and demand for financing within consumer spending, exports, and industries aligned with high-quality development standards appear to be relatively subduedHowever, the recent acceleration in the issuance of special government bonds, coupled with other fiscal measures, suggests that the growth rate of social financing may stabilize in the near future.

According to the latest data released by the central bank, the newly added scale of social financing in the first quarter amounted to 12.93 trillion yuan, a decrease of approximately 1.6 trillion yuan compared to the same period last yearThe total stock of social financing grew at an annual rate of 8.7%, reflecting a decline of 0.8 percentage points from the end of December 2023. The reduction in new social financing was primarily driven by a decrease in both renminbi loans and government bond financingBy the end of March, the broad money supply (M2) had also increased by 8.3% year on year.

Considering the high levels of credit and social financing recorded in the first quarter of 2023 as a result of repressed demand being unleashed, there is evidence to suggest that the pace of credit issuance may be more stable in the first quarter of 2024. This stability is being supported by large-scale equipment upgrades and the implementation of policies encouraging the replacement of old assets with new onesThe anticipated issuance of significant amounts of special government bonds could further contribute to the potential rebound in social financing growth rates.

When analyzing the rhythm and structure of loans in the first quarter, it was noted that renminbi loans increased by 9.46 trillion yuan, which was 1.14 trillion yuan less than the previous year

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This stark contrast raises the question of how to interpret such a substantial year-on-year decrease in renminbi credit.

Firstly, the first quarter of 2023 was characterized by unique circumstances as the economy began to recover from the pandemicThis led to a concentrated release of previously pent-up credit demand within a short time frame, thus inflating the year-over-year growth comparisonIn fact, when comparing with the first quarter of 2022, the new renminbi loan growth rate approximated 14%, indicating that the average growth rate over the two years remains relatively consistent with the annual increment of renminbi loans in 2022 and 2023.

Secondly, the pace of loans has stabilizedThe central bank emphasized in its monetary policy implementation report for the fourth quarter of 2023 that an excessive focus on monthly monetary credit data should be avoidedThey pointed out that loan increases exhibit distinctive seasonal characteristics influenced by both internal and external evaluations within banks as well as the nature of financing demandsA balanced approach that eases undue competition and mitigates unreasonable credit allocations is viewed as essential for supporting the ongoing economic recovery.

Typically, sharp spikes in credit issuance can lead to abrupt declines, which do not favor steady economic performanceFollowing the surge in credit during the first quarter of 2023, a notable retraction was observed in subsequent quartersThe credit distribution in early 2024 has adhered more closely to the central bank's directives.

The Chinese monetary policy report further stressed the need to revitalize unused financial resources within the economyIt implies that support for the real economy via credit and financing should not solely result from new increments; optimizing the efficiency of existing financial resources can significantly enhance support for economic activities under the same level of new financing.

In detailing the breakdown of loans, household loans in the first quarter increased by 1.33 trillion yuan, reflecting a decrease of 380 billion yuan from the previous year

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Among these, short-term loans saw an uptick of 356.8 billion yuan but were still down about 410 billion yuan year-over-year, while medium to long-term loans rose by 975 billion yuanThe concentrated release of suppressed consumer spending in early 2023 ushered in a consumer peakAs consumer behavior returns to normalcy, household consumption credit also naturally declines.

Despite ongoing sluggishness in newly constructed residential sales in the first quarter, the stability of medium to long-term loans extended to households suggests potential increases in loans related to second-hand properties and social housing.

For enterprises and institutions, loans rose by 7.77 trillion yuan in the first quarter, indicating a year-on-year decrease of 1.22 trillion yuanShort-term loans increased by 2.97 trillion yuan, a slight decrease year-on-year, whereas medium to long-term loans increased by 6.2 trillion yuan, reflecting a similar trendNotably, bill financing shrank by 1.5 trillion yuan, signaling concentrated retrenchmentThe decline in new loans for businesses suggests ongoing uncertainty in corporate investment willingness.

Looking at the bigger picture, the decrease in social financing growth rates requires us to be objective in our assessmentData from the central bank indicates that the social financing scale in the first quarter totaled 12.93 trillion yuan, reflecting a year-on-year decrease of 1.61 trillion yuanThe majority of the drop stemmed from declines in renminbi loans and net financing from government bonds; conversely, trust loans and corporate bonds experienced varying degrees of increases.

According to Guangfa Securities, the total issuance of special bonds in the first quarter reached 634.1 billion yuan, representing only 16.3% of the annual issuance target, showcasing a slow progress pattern influenced by the relatively favorable data from industrial sectors at the onset of the year and delayed allocations regarding special bond quotas and project proposals

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There are expectations that the pace of special bond issuances will accelerate in the second quarter.

Analyzing the economic data for January and February, while the overall economic performance at the start of the year seemed robust, the credit and social financing figures remained neutral, with declines in both M2 and existing social financing growth ratesThis raises the question of why this is occurring.

Guangfa Securities attributed the primary drivers for the actual growth in the first quarter to sectors like exports, manufacturing, and services, which display lower sensitivities and dependencies regarding financingThey noted that the previously elevated stock growth rates of social financing likely harbored influences from debt refinancing and shifting capital within certain sectors, whose contributions to social financing in the first quarter of 2024 are diminishing without imposing significant constraints on actual growth.

The central bank continues to target liquidity sufficiency with a stated aim to aligning the growth of social financing with economic expansion and price level expectationsWith a projected economic growth of around 5% and an approximately 3% price stability expectation, the current social financing and M2 growth rates above 8% are not seen as diverging from the central bank's targetsA recent press conference reiterated that the current rates of social financing and M2 are overall satisfactory, affirming their alignment with anticipated growth goals.

In the long term, the decline in social financing and M2 growth reflects an ongoing transition toward higher quality economic growth, underscoring that such a trend does not inherently signify a downturn in overall economic expansion.

Historically, during economic downturns, policies have heavily relied on real estate and infrastructure investments as drivers of economic stimulus

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