At a briefing in Beijing about financial statistics on January 18th, the word “stability” was repeated 36 times.
At the conference, Liu Guoqiang, deputy governor of People’s Bank of China (PBOC), acknowledged that the current economy was facing triple pressure. In order to solve this, he proposed that China needed to “open the monetary policy toolbox wider, maintain stable overall money supply and avoid a collapse in credit.”
POBC consecutively cut the reserve requirement ratio, or RRR, twice in July and December 2021, reducing by 0.5 percentage points each time. The move released about 342.3 billion USD of long-term funds. After the RRR cut, the current average deposit reserve ratio of financial institutions is 8.4%.
Regarding details of future RRR cuts from the central bank, Liu Guoqiang said there was little room left for further adjustment, but there will be some rate cuts.
US-based economist Huang Jun commented with Chinese media Da Ji Yuan that “The Cash Reserve Ratio of Chinese financial institutions is generally not lower than 8%. But now it’s getting closer and closer to 8%.”
Huang said that Chinese financial institutions’ bad debt rates were not small. If the bank’s deposit reserve ratio is too low, people would rush to the bank to withdraw money. Financial institutions might lose stability and face a credit crunch. As a result, it would cause a financial crisis.
Bank credit falls for the first time
Liu Guoqiang also mentioned that, in the future, credit support for small and micro-enterprises or SMEs, technological innovation, and green development would be increased.
However, according to POBC’s financial data for July 2021, the rates of social financing and medium and long-term loans for the month were lower than expected. Among them, the scale of medium and long-term corporate loans increased less by 16.3 billion USD compared with the same period of last year, while short-term ones decreased more by 2.46 billion USD.
Ron Thompson, head of the Asia restructuring practice at Alvarez & Marsal, told the Wall Street Journal that Chinese authorities “want Chinese banks and financial institutions to help the SMEs by backing them. But the banks themselves do view them as a riskier space.”
SMEs refers to Small and medium-sized enterprises.
To China, over 40 million SMEs have been the backbone of its economy. The sector alone generates half of the country’s tax revenue, 60% of its GDP, and 80% of urban employment. However, according to data obtained by South China Morning Post, in the first 11 months of 2021, about 4.37 million Chinese SMEs permanently closed down, which potentially would be a major blow to China’s GDP.
China’s leading business query platform Tianyancha showed that, in 2021, more than 390,000 small and micro Chinese enterprises closed every month on average. Accordingly, the number of SMEs closed in 2021 was almost twice that of 2019 and 10 times that of 2018.
Zhang Zhiwei, the chief economist at Pinpoint Asset Management, said he was not surprised by the trend as the business environment has gotten more challenging after the pandemic and “especially amid the zero-tolerance policy.” Zhang speculated that there might be a delayed effect on unemployment and bankruptcy rates, which could explain why the problem was considerably worse than last year.
Ren Zeping, the chief economist at Dongwu Securities, told SCMP that Chinese SMEs’ vulnerability is rooted in their “weak position in the industrial chain.”
According to the South China Morning Post, Zeping in his report said that, “[They] have insufficient bargaining power with upstream and downstream supply chains, government departments and financial institutions, so their cash flow is most vulnerable.”
Ren also stated that some of the government’s “one-size-fits-all” regulatory approaches had hurt smaller businesses more than larger ones.
Crackdowns on the fintech sector while supporting the manufacturing industry
Since 2020, the Chinese government has launched an unprecedented “anti-monopoly investigation” against networking companies. It frequently warned, interviewed, and issued fines to big firms of the industry such as Tencent and Alibaba. Since then, the scope of the authorities’ regulatory actions on the industry has continued to expand.
In 2021, Beijing penalized multiple segments of the tech industry, including entertainment, online e-commerce, live broadcast platforms, social media, and many Internet giants.
Explaining the Chinese government’s clampdown, Huang Jun laid out three main reasons behind it.
On the one hand, because the government implemented quantitative easing policies in the past, a lot of money went into the sector and stock market, but not the manufacturing industry and the real economy. On the other hand, the regime has been dealing with financial difficulties, with wealth being transferred abroad. Thirdly, by targeting private companies with regulations, Beijing can increase the proportion of state-owned enterprises.
He said the Chinese authorities were implementing loose monetary policy to stimulate the economy again because it fell short of economic expectations. Yet, they have not allocated funds to the SMEs and only offer help to the under-control manufacturing industry.
Huang believed this means that Beijing is still determined to carry out the “Made in China 2025” strategy, which Western society underestimated.
The plan was proposed in 2015 and seeks to lessen China’s reliance on foreign technology while also promoting Chinese technical manufacturers in the global marketplace.