China's biggest economic meeting this decade...
Household deleveraging blamed for flagging growth. Commercial banks dash to offload bad assets.
Our briefing on critical economic and financial developments in China as of Tuesday, 16 July, 2024:
China’s Communist Party convenes the Third Plenary Session of its Central Committee, set to be the most important economic summit in the country since the start of the 2020’s.
Household deleveraging has played a key role in China’s flagging economic growth and weak credit expansion, according to Zhang Yu (张瑜) a monetary researcher from China’s prestigious Renmin University.
Beijing has prioritised growth in consumption since the mid-point of the pandemic, yet struggled to achieve this policy goal BOC International’s Guan Tao ( 管涛) believes employment gains via services sector expansion could be the solution.
Chinese GDP grows 5% in first half, yet sheds momentum in second quarter, with domestic analysts highlighting weak household consumption.
Credit growth falters in the first half. Domestic analysts highlight a shift in China’s economic structure away from dependence upon the credit-intensive real estate sector towards less dependent emerging industries.
Commercial banks are now rushing to divest themselves of the bad debt assets amassed during the credit binge of the pandemic era.
The Communist Party convenes its most important economic meeting this decade
From 15 - 18 July, the 20th Central Committee of China's Communist Party is convening its Third Plenary Session - an event which is set to be China's most important economic meeting since the start of the decade.
Ever since the beginning of China's reform and liberalisation era in the late 1970's, third plenary sessions have customarily been landmark events for the Chinese central government to make definitive statements about economic policy.
The reform era itself is considered to have commenced with the third plenary session of the 11th Central Committee, which was held from 18 - 22 December 1978.
An editorial piece from the People's Daily - the flagship newspaper of the Communist Party, signalled further commitment to economic reform at this year's third plenary session.
"Over 40 years ago, the Communist Party of China made the key decision to engage in reform and opening," stated the editorial piece entitled "Opening up vast vistas for Chinese-style modernisation with further comprehensive reform"(以进一步全面深化改革开辟中国式现代化广阔前景).
"As we enter a new era, we will use the vast political courage and wisdom of the Party Central Committee with Comrade Xi Jinping at its core to create entirely new conditions for the mission of Socialism with Chinese Characteristics."
Chinese household deleveraging blamed for tepid economic growth
Zhang Yu (张瑜), a researcher from Renmin University’s International Monetary Research Institute, says household deleveraging is one of the key reasons why GDP growth and credit expansion in China has recently faltered.
Zhang points out that in the first half of 2024, short-term household loans saw net growth of 0.3 trillion yuan, for the lowest print since the first half of 2009.
Household medium and long-term borrowing saw net growth of 1.2 trillion yuan, for their lowest level since the first half of 2013.
“Weak loan growth indicates that households are unwilling to expand their debt burden,” Zhang wrote in an opinion piece on Chinese social media.
Ailing profits and want of optimism amongst Chinese private enterprise is also undermining their willingness to invest, further compounding weak domestic demand.
For this reason, Zhang believes “support in the form demand-side policies is still a necessity.”
She forecasts a short-term U-shaped recovery for China’s economy prompted by macroeconomic policy adjustments from the central government, including more rate cuts and greater exchange rate flexibility.
China’s struggle to drive consumption could find relief in services growth
China has heavily prioritised growth in consumption since the mid-point of the pandemic, looking to expansion of domestic demand as a key engine of post-COVID economic recovery.
At the end of 2022, the Central Economic Work Conference gave the highest priority to “restoring and expanding consumption,” while the conference for the following year called for “spurring potential consumption,” and achieving in consumption from post-pandemic recovery to sustained growth.
Guan Tao ( 管涛), chief global economist with BOC International, believes expansion of employment via growth in China’s services sector to to be the key to achieving ongoing consumption growth.
“Consumption is a function of employment and incomes,” Guan wrote in an opinion piece published on Chinese social media.
“Inadequate employment is what has led to the current insufficiency of effective demand.
“Given this is the post-industrial era, development of tertiary industry and growth of employment in the services sector is a key means for supporting the expansion of consumption.”
Chinese GDP grows 5.0% in first half, sheds momentum in second quarter
In the first half of 2024, China's GDP posted nominal growth of 5.0% in year-on-year (YoY) terms to hit 61.6836 trillion yuan, according to figures from the National Bureau of Statistics.
In the second quarter GDP growth eased to 4.7%, slowing 0.6 percentage points from the first quarter to fall short of analyst expectations.
Domestic observers impute the slowdown in growth to weak internal demand, with some calling for more vigorous policy measures to remedy the issue.
"Market demand, as represented by household consumption, performed quite weakly in the second quarter," said Wang Qing (王青), chief macro-analyst with Golden Credit Ratings.
"This dragged considerably on industrial production and overall economic performance."
Chinese credit growth falters in first half – domestic media highlights role of ailing property sector
New financial data points to faltering credit growth in China, with domestic media highlighting the impact of structural shifts in the economy.
As of the end of June the M2 money supply stood at 305.02 trillion yuan, for YoY growth of just 6.2%, according to figures released by the People's Bank of China (PBOC) – the Chinese central bank on 12 July.
Total social financing – a broad measure of credit extension across China’s economy, was 18.1 trillion yuan in the first half, for a contraction of 3.45 trillion yuan compared to the same period in 2023.
This included a 3.15 trillion yuan decline in new renminbi loans to the real economy compared to the same period last year to 12.46 trillion yuan.
Securities Journal cites domestic analysts in imputing weak credit growth to changes in China's economic structure - in particular the declining role of the property sector.
"Following deep adjustments to real estate and other capital intensive sectors, the demand for funds has markedly declined,” the report said.
"The contribution made by hi-tech manufacturing, light industry and services to economic growth has continually increased - their dependence upon credit resources isn't high."
Chinese banks make haste to get rid of rotten assets
Banks in China are making haste to divest themselves of burdensome "special assets" on their balance sheets – primarily comprised of non-performing loans, after racking up bad debt during the credit splurge of the pandemic.
"The need for banks to remove special assets from their balance sheets over the past two years has definitely become more urgent over the past two years," said one industry source to China Securities Journal.
"The rapid growth of credit in the preceding period created a considerable volume of special assets, and effectively disposing of these assets has become a problem that the banking sector faces in common at present."
Zeng Gang (曾刚), chair of the Shanghai Institution for Finance & Development, said that “special assets” (特殊资产) is a comparatively obscure technical term in China’s financial sector compared to the more prevalent “non-performing assets” (不良资产).
Zeng said that while the two terms largely overlap in significance, “special assets” are still largely comprised of “non-performing assets.”
“Special assets not only includes defaulting creditor’s rights, it also includes assets free of default, but those prices are volatile or have diverged from sound valuation,” Zeng said.
Removal of these assets has become more urgent following the decision of Chinese regulators in 2023 to include special-mention loans within the remit of non-performing assets.
“The most effective time for the management of financial risk isn’t following default, but prior to the onset of actual default,” Zeng said.
“Intervening when asset values see major changes can not only effectively reduce the likelihood of default, it can also greatly reduce the losses caused by default.
“For this reason, the real effective target of non-performing asset regulation should not be limited to non-performing assets that have already defaulted, but must also expand to include those assets that have not defaulted, yet whose values have undergone major change due to various factors.”
Figures from the National Financial Regulatory Administration (NFRA) indicate that as of the end of Q1 2024, the non-performing loans of national commercial banks stood at 3.4 trillion yuan, for an increase of 141.4 billion yuan compared to the end of 2023.