A former senior official with the Chinese central bank has called for several key changes to be the total social financing metric, including the removal of undiscounted banker’s acceptances and the inclusion of offshore financing.
The metric of “total social financing” (社会融资规模) is unique to China, and was first officially launched by the People’s Bank of China (PBOC) in April 2011 as a measure of the aggregate volume of funds provided by China’s domestic financial system to the private sector of the real economy in the first quarter of that year.
PBOC has subsequently released TSF readings on a monthly basis, including outstanding TSF, as well as compiled data for the near decade-long period prior to its launch running from 2002 to 2010.
TSF currently encompasses four main categories of financing:
- The on-balance sheet loans of financial institutions, including renminbi and foreign currency loans;
- Financing provided by financial institutions via off-balance sheet channels, primarily encompassing entrusted loans, trust loans and undiscounted banker’s acceptances;
- Direct financing, encompassing the two items of non-financial enterprise bonds and domestic share financing, but not including central government or local government bonds;
- Other forms of financial support provided to the real economy, including insurer’s compensation, investment by financial institutions in real estate, and loans provided by micro-loan and loan companies.
PBOC made a number of amendments to TSF last year, placing “asset-backed securities of depository financial institutions” and “loan write-offs” in the fourth category starting from July 2018, and including “local government special bonds” starting from September 2018.
In an article written for The Economic Observer Wang Yongli (王永利), former PBOC deputy governor and chief economist with Neptunus, highlighted prevailing inadequacies with TSF as a metric driest these changes.
These include failure to include the private direct financing (investment and loans) that isn’t mediated by a financial institution, as well as online P2P lending, private equity financing and equity crowd funding.
According to Wang it’s imperative that the Chinese central bank address these issues, given the complex relationship between TSF and the money supply.
“It’s precisely because of the increasing importance of TSF that demands of the accuracy of this index have increased,” writes Wang.
“In China if there are major changes to the financing structure, the share of indirect debt financing declines and the scale of derived money is constrained, then there is the possibility that growth in the total money supply will decelerate or even go into reverse without impacting rational growth in TSF.
“[This] is because direct equity financing (with the exception of the purchase of corporate equity by the central bank or commercial banks) can increase TSF and satisfy the financing needs of the public without expanding the money supply.
“Consequently only looking at money supply indices presents definite problems and can readily distort monetary policy….if it is possible to account for changes to total social financing, this will definitely expedite the more effective deployment of monetary policy.”
Wang recommends three key changes to TSF as currently employed by the Chinese central bank.
The first is a change in the official definition of TSF from “the total amount of funds obtained by the real economy from the financial system within a set timeframe” (一定时期内实体经济从金融体系获得的资金总额) to “the total amount of funds obtained by the real economy by means of the financial system” (实体经济部门通过金融体系获得的资金总额), in order to better reflect the significance of direct finance in the form of share and bond purchases as well as entrusted loans.
The second is the removal of undiscounted banker’s acceptances from total social financing, given that the metric “should refer to funds actually obtained by the real economy.”
While undiscounted banker’s acceptances certainly involve the extension of credit by banks, Wang points out that “this is an off-balance sheet operation in which banks do not provide any actual funds prior to discounting.”
“For this reason including undiscounted banker’s acceptances in calculations of total social financing is inappropriate, and it is very easy for irregular large-scale increases or declines to impact changes and analysis of total social financing.
“I recommend excising undiscounted banker’s acceptances from total social financing as early as possible.”
The third change advocated by Wang is the handling of offshore financing.
“In order to fully reflect the total amount of social financing within a given time frame, it’s appropriate to include funds entering China that have been obtained by the real economy via offshore share and bond issuance under total social financing.”