At end-February, M2 and the stock of aggregate financing to the real economy (AFRE) maintained stable growth, increasing by 8% and 10.1% year-on-year, respectively. In the first two months, new RMB loans increased by RMB 374.8 billion year-on-year to RMB 4.1 trillion while AFRE expanded by RMB 5.3 trillion, RMB 1.05 trillion more than the growth in the same period last year. The year-on-year AFRE growth was higher than end-2018 for two consecutive months, indicating initial success of moves to curb its continuous slide, and providing support for the start of economic and financial work in 2019. Overall, this was mainly attributable to stepped-up countercyclical adjustment in macro regulation and marginal improvement achieved in monetary policy transmission, which showed the cumulative effect of prudent monetary policy.
1. M2 maintained the growth of around 8% while the M1 growth picked up
At end-February, the M2 growth was 8% year-on-year. We can rightly say that the sustained stable growth of M2 this year reflected the cumulative effect of preceding monetary policy adopted. At the same time, commercial banks stepped up fund use so that on-balance-sheet credit, bond investment, as well as equities and other investments posted large increases, contributing to the maintenance of stable M2 growth. In the first two months, on-balance-sheet credit, bond investment, and equities and other investments rose by RMB 4.1 trillion, 872.7 billion and 832.9 billion, respectively, up by RMB 374.8 billion, 771.5 billion and 370.2 billion year-on-year, respectively.
At end-February, M1 recorded a year-on-year growth rate of 2%, up by 1.6 percentage points from a month earlier. As we can see, the slow M1 growth in January was mainly caused by the sharp fall in corporate demand deposits for the month as the end of January this year was the peak period for salary and bonus payments right before the Spring Festival. Then the situation improved much in February. Generally speaking, the M1 slowdown was mainly a reflection of structural changes in all-system liquidity rather than changes in aggregate liquidity.
2. The year-on-year AFRE growth was higher than end-2018 for two consecutive months
At end-February, outstanding AFRE posted a year-on-year growth rate of 10.1%, outpacing the growth at end-2018 for two consecutive months. Major contributing factors for the pickup of AFRE growth this year included the sizable year-on-year increase in lending, the substantial rise in bond financing, and the smaller fall in entrusted loans.
First, lending increased considerably year-on-year. At end-February, the outstanding balance of loans issued to the real economy stood at RMB 139 trillion, up by 13.3% year-on-year, 0.2 percentage point higher than a year earlier; outstanding RMB loans accounted for 67.6% of outstanding AFRE, up by 1.9 percentage points from a year earlier. The first two months saw an increase of RMB 4.3 trillion in outstanding RMB loans, RMB 625.9 billion more than the growth in the same period a year earlier.
Second, bond financing rose significantly. The growth of bond financing had started to rise since Q2 2018. Entering 2019, corporate bond financing picked up markedly, with the amount outstanding posting RMB 20.5 trillion at end-February, up by 10.7% year-on-year, the same pace as the previous month and the fastest since April 2017. At end-February, outstanding bonds accounted for 10% of outstanding AFRE, up by 0.1 percentage point from a year earlier. In the first two months, net financing via local government special bonds reached RMB 285.9 billion, up by RMB 275.1 billion from a year earlier.
Third, the decline in entrusted loans moderated continuously, a structural feature newly observed of AFRE this year. In the first two months, entrusted loans fell by RMB 120.8 billion, RMB 25.1 billion less than the decrease a year earlier. Entrusted loans dipped by RMB 69.9 billion in January and posted a smaller fall of RMB 50.8 billion in February.
Overall, the rebound of AFRE growth in the first two months was largely attributable to stepped-up countercyclical adjustment in macro regulation and marginal improvement achieved in monetary policy transmission.
One thing to note is that seasonal factors should be taken into consideration in the observation of AFRE. January and February data, or rather data for even longer periods, should be viewed as a whole while attention should not be overly focused on data for a single month. Judging from January and February data combined, AFRE has seen stable growth, and the full-year AFRE growth is projected to be in line with nominal GDP growth.
3. The decline in the three off-balance-sheet financing items of AFRE narrowed down markedly
In the first two months, the three off-balance-sheet financing items of AFRE declined by a total of RMB 21.7 billion, indicating significant improvement compared with the average monthly fall of RMB 209.2 billion in Q4 2018. Specifically, entrusted loans dropped by RMB 120.8 billion, narrowing down markedly compared with the average monthly fall of RMB 149 billion in Q4 2018; trust loans and undiscounted bankers’ acceptances both stopped falling and started to rise, increasing by RMB 30.8 billion and 68.3 billion, respectively, in the first two months.
The improvement in off-balance-sheet financing resulted from concerted efforts. First, work has been done to strengthen forward-looking pre-emptive adjustment and fine-tuning of monetary policy, and to enhance coordination with financial regulation policy. Second, financial institutions have been gradually adapting to new regulations on asset management and dealing with off-balance-sheet asset holdings. Third, the amount of off-balance-sheet financing with concentrated maturity dates has been decreasing while off-balance-sheet businesses compliant with regulations maintain sound growth.
Overall, the slide of off-balance-sheet financing in AFRE will stabilize so that better services will be provided to meet financing needs of the real economy.
4. Bills grew at normal pace excluding seasonal factors
Bankers’ acceptances include discounted and undiscounted ones. The so-called discounting occurs when a holder sells the bill before maturity to a bank. Discounted bills thereby become the bank’s on-balance-sheet loans called bill financing. Undiscounted bankers’ acceptances, classified as off-balance-sheet financing, are a form of banks’ credit support for enterprises.
In January 2019, outstanding bankers’ acceptances grew by RMB 894.6 billion, with bill financing and undiscounted bankers’ acceptances increasing by RMB 516 billion and 378.6 billion, respectively. Things were reversed in February when outstanding bankers’ acceptances declined by RMB 140.8 billion. Specifically, bill financing grew by RMB 169.5 billion whereas undiscounted bankers’ acceptances fell by RMB 310.3 billion.
The dramatic growth of both bill financing and undiscounted bankers’ acceptances in January can be explained by the following. First, enterprises were motivated to use bills by falling interest rates in the bill market. Second, as more settlements took place between enterprises before the Spring Festival, seasonal factors contributed to the growth of bills. Third, as loan quotas were relatively sufficient, some banks stepped up the promotion of bills. Besides, there were cases of arbitrage arising in the market.
The rapid fall in the volume of bill business in February was mainly attributable to seasonal factors. As the Spring Festival holiday this year fell in February, there were fewer working days in the month, leading to fewer settlements and therefore less demand from enterprises for bill issuance. Also, February is traditionally a “minor month” for AFRE growth. Furthermore, the driving forces behind the growth of bankers’ acceptances in January were tapering off.
Accordingly, the observation of the bill business should not be based on data for a single month. January and February data combined, outstanding bankers’ acceptances increased by RMB 753.8 billion, with bill financing and undiscounted bankers’ acceptances rising by RMB 685.5 billion and 68.3 billion, respectively. Overall, the bill business has played a bigger role in supporting the real economy this year.
Compared with other means of financing, bills have the apparent advantages of shorter maturity, more convenience, better liquidity, and lower financing cost, which particularly benefit micro and small enterprises as well as private enterprises. As bill financing and undiscounted bankers’ acceptances can both support the growth of the real economy effectively, the financial authorities readily encourage the development of bill business with authentic trade background, but are intolerant of arbitrage through bill financing. More work needs to done in the future to smooth the transmission mechanism of monetary policy and improve the efficiency and performance of the financial sector to support the real economy.
