Experts call for clear deleveraging target

Money supply and credit growth in August weakened

Fast deleveraging and gloomy credit demand may hamper the Chinese financial system’s efficiency in funding the real economy, said analysts, and measures should be prepared to avoid market fluctuations.

A “financing cliff”, or a dra- matic drop in available funds, should be prevented, given the recent performance of the financial market, and this requires the monetary authority to state a clear target and the pace of the ongoing deleveraging process, said a group of economists in a recent report issued by Tsinghua University.

The People’s Bank of China, the nation’s central bank, issued the August financial data on Wednesday, which indicated that both money supply and credit growth have weakened, showing that the country’s deleveraging process, or the move to a lower debt-to-GDP ratio, is still proceeding at a rapid pace.

New yuan loans increased by 1.28 trillion yuan ($186 billion) in August, slower than 1.45 trillion yuan in July. The growth of broad money supply, or M2, was 8.2 percent in August, down from 8.5 percent in July, almost back to its lowest level since 1986.

The growth of total social financing accelerated a little to 1.52 trillion yuan, compared with 1.04 trillion yuan in July and 1.18 trillion yuan in June, the PBOC reported.

Monetary policy needs to be coordinated with fiscal and financing measures to ensure smooth deleveraging and reduce shocks from regulatory tightening, especially when M2 and credit have both seen drops, according to Chen Daofu, an economist with the Development Research Center of the State Council, and one of the members of the group that issued the Tsinghua University report.

Stress testing is needed, based on quantitative modeling, to assess the resilience of the financial system in some extreme scenarios, targeting particularly adverse shocks and supporting the monitoring of financial vulnerability, suggested the report.

In order to prevent draining liquidity, the central bank has injected nearly 1.5 trillion yuan into the financial sector through cutting the cash amount required to be reserved in financial institutions three times this year. The measure did ease liquidity stress in the interbank market, but companies showed less interest in borrowing money.

Banks still prefer to lend to property developers other than infrastructure projects, despite many efforts by policymakers to boost infrastructure investment. The latter usually needs a longer term to see investment returns, and the local government debt level is already high, said Shen Jianguang, chief economist of JD Finance.