Leading Chinese Economist Calls for Moderation of Covid Strategy, Says Real Credit Demand Inadequate


A leading Chinese economist says levels of real credit demand remains insufficient, as well as called for adjustments to the country’s COVID-19 measures.

Dong Ximiao (董希淼), researcher from the Fudan University Financial Research Academy and chief researcher at the Zhongguancun Internent Finance Research Academy, says that real demand for credit has diminished in the Chinese economy since the start of 2022.

“Looking at recent financial data and real surveys, problems such as insufficiency of effective credit demand amongst Chinese enterprises and households have worsened,” said Dong in an article written for state-owned media.

“This is the result of complex and variable internal and external factors, and also related to current macro-economic policy.”

In the month of March renminbi loans increased by 3.13 trillion yuan, including 2.48 trillion yuan in enterprise loans, the later of which marked an increase of 880 billion yuan compared to the same period last year.

Dong points out however that there are still structural problems when it comes to China’s enterprise lending, with a heavy skew towards short-term credit instead of long-term investment loans.

Out of the 2.48 trillion yuan in enterprise loans, 808.9 billion yuan consisted of short-term loans and 318.7 billion yuan was in the form of notes financing, for year-on-year (YoY) increases of 434.1 billion yuan and 471.2 billion yuan respectively.

In March household lending also decelerated, with short-term loans and medium-and-long term loans increasing by 384.8 billion yuan and 373.5 billion yuan respectively, for declines of 139.4 billion yuan and 250.4 billion yuan compared to the same period last year.

“From this we can see that whether it’s enterprise or household credit demand, there is a trend of contraction,” said Dong.

Dong points to conflict in Ukraine, global inflation, rate hikes from the Federal Reserve and the reimposition of COVID-19 containment measures in China as key causes of undermined confidence and weaker demand.

He also highlighted the impact of problems in the Chinese real estate sector, with policy responses stymieing access to credit for many sectors and enterprises.

“In objective terms, because of the rapid expansion of non-financial enterprises in the recent past, some enterprises have high leverage ratios, and do not have much room to increase leverage,” Dong said.

“With the dual pressures of the spread of the pandemic and downward economic trends, the risk preferences of financial institutions are declining, and their attitude towards credit extension has become cautious.

“This has lead to the phenomenon of inadequate effective credit demand and difficulty in financing for SME’s co-existing.”

Dong outlined a range of policy recommendations including:

  1. Effectively coordinating and balancing pandemic control and prevention with economic development. Reducing the excessive impacts of pandemic control and prevention on the economy and people’s lives as soon as possible. Dong points out that a meeting of the Politburo on 29 April called for “flexibly adjusting prevention and control measures when appropriate,” as well as adopting measures to “minimise the impact of the pandemic to the greatest extent possible upon economic and social development.”
  2. Extraordinary use of macro-economic policy, walking ahead of the curve and helping market entities to resolve difficulties as well as the real economy to steadily cover. Dong calls for “more actively assertive and vigorous” monetary policy, as well as an increase, with continued reductions in the reserve ratio and benchmark rates, and more effective use of structured monetary policy tools.
  3. Maintaining policy stability, reducing policy uncertainty, strengthening communication with the market, guiding market expectations, invigorating confidence and stimulating demand. According to Dong “confidence is more precious than gold,” and for this reason Chinese regulators need to engage in “full confidence and send policy signals prior to the release of new policies or adjustments to existing policies.”