Page 16 - 2018 White Paper on the Business Environment in China
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8 White Paper on the Business Environment in China
numbers, perhaps because of the Chinese Communist campaign against excess leverage has helped squeeze
Party’s own fixation on the real GDP growth target. It’s growth of M2, the broadest measure of money supply,
also because rising commodity prices are driving much to a record low in June even as new loans and aggregate
of the recent improvement. The common argument is financing exceeded expectations. (In financial terms,
that higher steel, coal, oil and gas prices don’t signal a M2 is a measure of the money supply that includes all
genuine improvement in economic momentum. Yet elements of M1 as well as “near money.” M1 includes
China’s commodity producers and heavy industrial cash and checking deposits, while near money refers to
enterprises also happen to be the country’s most highly savings deposits, money market securities, mutual funds
indebted businesses. Chinese steelmakers were sitting and other time deposits. These assets are less liquid
on 38 billion yuan in profits in the first five months of than M1 and not as suitable as exchange mediums, but
2017, after making only 9 billion yuan during the same they can be quickly converted into cash or checking
period of 2016. Coal companies raked in 123 billion deposits). It may seem counter-intuitive that credit
yuan through May. Improved nominal GDP performance can be expanding faster at a time when the supply of
has real implications for cash flows at these troubled money isn’t - but the People’s Bank of China has an
companies (Polk). explanation. Slowing M2 growth shows more efficient
use of credit and that will be the “new normal,” said Ruan
Most importantly, China finally seems to be grappling Jianhong, the central bank’s spokeswoman and head of
with its debt problems in ways that don’t always make its statistics department. Policy makers have tightened
the headlines. Since the middle of 2016, China’s banking regulation to rein in leverage and curb risky credit as
regulator has been pushing financial institutions to they strive to reduce financial risks, even as the overall
establish creditor committees to renegotiate their claims debt burden in the economy continues to rise. Though
on companies. These committees are comprised of tighter bond and money market rates are damping
three or more lenders, so banks can’t negotiate against down speculative lending, June 2017’s data indicated
each other’s interests, and they address a fundamental credit still is flowing to corporations and households. The
problem: the frayed relationship that occurs between “top leadership is frustrated that money in this economy
lenders and debtors in challenging economic times. refuses to go to the right places,“ said Andrew Polk, co-
In practice, the negotiation process allows banks to founder of research firm Trivium China in Beijing. “So far,
give borrowers a break in return for a clean and clear tighter financial regulation is providing the beginnings
accounting of a company’s financial position. Generally, of a remedy.” Policy makers have tightened regulation
banks take some write-offs and extend loan maturities to rein in leverage and curb risky credit as they strive to
while lowering interest rates on some debt. Other reduce financial risks, even as the overall debt burden
liabilities can be transferred to a parent company, and in the economy continues to rise. Though tighter bond
sometimes a full-scale asset restructuring is initiated. and money market rates are damping down speculative
Because these committees are ad hoc institutions, there’s lending, June’s data indicates credit still is flowing to
no overarching data tracking their proliferation. None corporations and households. The “top leadership is
of this is to say that China is truly out of the woods. An frustrated that money in this economy refuses to go
improvement in the structure of existing credit needs to to the right places,“ said Andrew Polk, co-founder of
be matched with an effort to get new credit flows into research firm Trivium China in Beijing. “So far, tighter
more productive parts of the economy. So far it seems financial regulation is providing the beginnings of a
that a tighter focus on financial speculation has simply remedy” (Hamlin et al.).
driven new lending back into property markets. The
central bank has always been clear that any genuine By July 2017, a sense of steadiness descended on
deleveraging would be a multi-year process. Improving China’s markets after a flurry of regulatory activity
the relationship between new credit and new GDP has emboldened investors. Analysts, though, were
growth is an essential and welcome first step (Polk). waiting for the storm. Liquidity roared back after a dry
spell during April and May, when President Xi Jinping
The Chinese monetary authorities are attempting ordered a check of China’s financial system and an
something feat that many believe might be impossible: intensified focus on deleveraging saw mainland debt
Damping down more speculative parts of the financial and equities sell off. That, coupled with what seems like
system without choking off credit to the real economy. a lull in Beijing’s regulatory fervor, sparked resumption
So far, according to Bloomberg, they’re pulling it off. A in corporate bond buying and a return to borrowing as
16
numbers, perhaps because of the Chinese Communist campaign against excess leverage has helped squeeze
Party’s own fixation on the real GDP growth target. It’s growth of M2, the broadest measure of money supply,
also because rising commodity prices are driving much to a record low in June even as new loans and aggregate
of the recent improvement. The common argument is financing exceeded expectations. (In financial terms,
that higher steel, coal, oil and gas prices don’t signal a M2 is a measure of the money supply that includes all
genuine improvement in economic momentum. Yet elements of M1 as well as “near money.” M1 includes
China’s commodity producers and heavy industrial cash and checking deposits, while near money refers to
enterprises also happen to be the country’s most highly savings deposits, money market securities, mutual funds
indebted businesses. Chinese steelmakers were sitting and other time deposits. These assets are less liquid
on 38 billion yuan in profits in the first five months of than M1 and not as suitable as exchange mediums, but
2017, after making only 9 billion yuan during the same they can be quickly converted into cash or checking
period of 2016. Coal companies raked in 123 billion deposits). It may seem counter-intuitive that credit
yuan through May. Improved nominal GDP performance can be expanding faster at a time when the supply of
has real implications for cash flows at these troubled money isn’t - but the People’s Bank of China has an
companies (Polk). explanation. Slowing M2 growth shows more efficient
use of credit and that will be the “new normal,” said Ruan
Most importantly, China finally seems to be grappling Jianhong, the central bank’s spokeswoman and head of
with its debt problems in ways that don’t always make its statistics department. Policy makers have tightened
the headlines. Since the middle of 2016, China’s banking regulation to rein in leverage and curb risky credit as
regulator has been pushing financial institutions to they strive to reduce financial risks, even as the overall
establish creditor committees to renegotiate their claims debt burden in the economy continues to rise. Though
on companies. These committees are comprised of tighter bond and money market rates are damping
three or more lenders, so banks can’t negotiate against down speculative lending, June 2017’s data indicated
each other’s interests, and they address a fundamental credit still is flowing to corporations and households. The
problem: the frayed relationship that occurs between “top leadership is frustrated that money in this economy
lenders and debtors in challenging economic times. refuses to go to the right places,“ said Andrew Polk, co-
In practice, the negotiation process allows banks to founder of research firm Trivium China in Beijing. “So far,
give borrowers a break in return for a clean and clear tighter financial regulation is providing the beginnings
accounting of a company’s financial position. Generally, of a remedy.” Policy makers have tightened regulation
banks take some write-offs and extend loan maturities to rein in leverage and curb risky credit as they strive to
while lowering interest rates on some debt. Other reduce financial risks, even as the overall debt burden
liabilities can be transferred to a parent company, and in the economy continues to rise. Though tighter bond
sometimes a full-scale asset restructuring is initiated. and money market rates are damping down speculative
Because these committees are ad hoc institutions, there’s lending, June’s data indicates credit still is flowing to
no overarching data tracking their proliferation. None corporations and households. The “top leadership is
of this is to say that China is truly out of the woods. An frustrated that money in this economy refuses to go
improvement in the structure of existing credit needs to to the right places,“ said Andrew Polk, co-founder of
be matched with an effort to get new credit flows into research firm Trivium China in Beijing. “So far, tighter
more productive parts of the economy. So far it seems financial regulation is providing the beginnings of a
that a tighter focus on financial speculation has simply remedy” (Hamlin et al.).
driven new lending back into property markets. The
central bank has always been clear that any genuine By July 2017, a sense of steadiness descended on
deleveraging would be a multi-year process. Improving China’s markets after a flurry of regulatory activity
the relationship between new credit and new GDP has emboldened investors. Analysts, though, were
growth is an essential and welcome first step (Polk). waiting for the storm. Liquidity roared back after a dry
spell during April and May, when President Xi Jinping
The Chinese monetary authorities are attempting ordered a check of China’s financial system and an
something feat that many believe might be impossible: intensified focus on deleveraging saw mainland debt
Damping down more speculative parts of the financial and equities sell off. That, coupled with what seems like
system without choking off credit to the real economy. a lull in Beijing’s regulatory fervor, sparked resumption
So far, according to Bloomberg, they’re pulling it off. A in corporate bond buying and a return to borrowing as
16
