Deleveraging helps reduce irregular financing

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“If we look at the difference between growth and the total social financing, and also the broad money supply – M2 growth, the two growth rate is converging,” said Hong Hao, the chief China strategist of BOCOM International Holdings, explaining the phenomenon suggests that off-balance-sheet financing is actually shrinking substantially due to deleveraging.

Hong’s comments came after deleveraging, as part of stabilizing China’s economy, was emphasized recently by the Political Bureau of the Central Committee of the Communist Party of China, on which top leaders agreed that one of the focuses in H2 should be preventing and resolving major risks, including decreasing financial risks by deleveraging.

According to July data from the People's Bank of China, social financing increased about 1.32 trillion US dollars in the first half of this year, dropping nearly 300 billion dollars year-on-year. The People’s Bank of China (PBOC) said that the decline was mainly thanks to the government’s strengthening supervision and deleveraging policy.

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Meanwhile, stocks market's social financing edged lower while the bond market's social financing rebounded in the first half of this year. And bank loans to the real economy rose by over 1.27 trillion US dollars in the same period.

“Loans are flowing from informal financing platforms and real estate sectors to companies that line with national standards,” Ruan Jianhong explained, who is the spokesman of China’s central bank.

Ruan also said that the PBOC will enhance its prediction on market trend and pre-adjust policies to maintain reasonable liquidity in the future. "We will maintain the social financing to increase at a reasonable pace," he added.

Hong pointed out that infrastructure spending is a sector that worth to focus on.

“In the first half of this year, infrastructure spending has been declining substantially. I think it’s the fastest speed I ever seen in recent years,” he said.

“So I think in the second half if we can boost infrastructure spending, especially in the western part of China, it would help stabilize economic growth, and that would probably give the central bank to manipulate its monetary policy.”