China's financial conference addresses two mid-term challenges

Editor's note: Wang Jianhui is the general manager of the research and development department at Capital Securities. The article reflects the author's opinions and not necessarily the views of CGTN. 

It has been 26 years since China's first National Financial Work Conference was held, when the "Asian financial storm" rampaged in 1997. The Chinese top leaders and regulators not only figured out ways to deal with the ongoing crisis but also initiated a series of structural reforms to prevent future risks and better serve a market-oriented economy and its opening-up.

Since then, it has become routine for the said conference to work out a master plan both to improve the overall financial regulation and strengthen the risk-control system, which has gained greater significance in the last decade. In 2017, "black swan" and "grey rhino" concerns were addressed. This time the session has been delayed probably because the first part, namely the overhaul-like adjustments in financial regulating bodies, must be done first during the National People's Congress (NPC) and Chinese People's Political Consultative Conference (CPPCC) session in March. That leaves the second part as the major focus of the sixth conference, where two mid-term challenges would likely be responded to somehow.

We expect to see how regulators would further alleviate severe hardship suffered by some major industries without jeopardizing the previous success of risk-controlling measures. Since 2021, the property industry, for instance, has undergone an unprecedented de-leveraging process.

The growth of loans for industries has slowed down drastically from 9.5 percent in 2021 to 0.5 percent in the first three quarters of 2023. The industry share among the total loans from financial institutions has declined from 28.83 percent in the third quarter of 2020 to 23.14 percent in the second quarter of 2023.

To a certain extent, the banking sector has become less dependent on the property industry and less exposed to its fluctuations due to policy measures. Lack of sufficient fund support, however, has been causing serious pains for many real estate companies including some industry leaders such as Evergrande and Sunac.

The industry's contribution to the national GDP has contracted from 4.79 percent in 2021 to -1.09 percent in the third quarter of 2023, and its investment growth is down from 24.7 percent to -7.8 percent. The central bank implemented re-aligning policy measures including favorable guidelines for personal loans and setting up special credit facilities for the completion of construction projects, but the effects remain yet to be seen. The regulators need to come up with more new tools to safeguard the soft-landing of the industry without returning to the old way of simple credit expansion.

The second challenge would be on gradually turning to a prudent monetary stance while maintaining sufficient loan supply to the economy and keeping non-performing loans under control. While the de-leveraging process in the property industry and to a certain degree in the financial industry has made significant progress, the uptrend of macroeconomic leverage continues, and potential risks associated with accumulated debts as "grey rhino" still linger within our sights.

In the first three quarters of 2012, total outstanding loans amounted to 61.51 trillion yuan ($8.4 trillion), equivalent to 1.59 times of the GDP. By the end of September this year, total loans reached 234.6 trillion yuan accounting for 257 percent of the GDP in the same period. Pursuing growth by more debts will not be sustainable as experiences have shown in some Latin American and African countries. 

The current level of debts or leverage is alarming not only because economic growth has declined from 7.9 percent in 2012 to 3 percent in 2022 (slower growth means less wealth created, thus more time is needed to pay off the debts) but also because of non-performing loans, which increased from 584.3 billion yuan in 2012 to 3.78 trillion yuan (or from 0.95 percent to 1.61 percent of the total outstanding loan). Its share of the GDP grew from 1.51 percent to 4.14 percent.

Turning the monetary policy back to neutral surely helps but it is not viable currently since financial institutions count on more funds or credit available to generate more loans so that they could earn more interest to cover losses. The financial conference may offer some possible macroeconomic solutions while encouraging market participants to change their capital-intensive business models in favor of innovative and sustainable ones.