Image credits - CNN
China’s central bank unleashed a torrent of loans in 2023, pushing annual lending to a record high, but the world’s second-largest economy continues to struggle, raising concerns about the effectiveness of this monetary stimulus.
While December’s new loans fell short of expectations, at 1.17 trillion yuan ($163.31 billion), they capped a year that saw total credit extended by banks soar to 22.75 trillion yuan. This figure dwarfs the previous record of 21.31 trillion yuan set in 2022 and is roughly equivalent to the UK’s gross domestic product.
Despite this unprecedented injection of cash, China’s growth engine sputtered in 2023. The post-pandemic bounce fizzled out faster than anticipated, leaving consumer and business confidence anaemic. Local governments burdened by heavy debts further weighed down the economy, while the property market remained in the doldrums, dragging down construction and investment.
Despite these headwinds, policymakers are sticking to their official growth target of around 5% for 2023 and 2024. However, analysts are calling for more easing measures from the People’s Bank of China (PBOC) to combat deflationary pressures and revive the ailing housing market.
“Concerns are mounting over how long it will take the housing slump to bottom out,” said Li Wei, an economist at Ping An Securities. “The PBOC is likely to unveil fresh stimulus initiatives soon, possibly including liquidity injections and interest rate cuts.”
The central bank faces a delicate balancing act. Pumping more credit into the system could reignite the property bubble, further aggravating financial stability concerns. Conversely, relying solely on traditional monetary policy tools may be insufficient to boost consumption and counter deflationary pressures.
Data reveals a worrying trend: in 2023, household loans comprised only 20% of total new loans, while corporate loans accounted for a whopping 80%. This suggests that credit is flowing more readily to businesses than to consumers, potentially deepening the deflationary spiral.
Adding to the concerns, broad M2 money supply, a gauge of liquidity in the economy, grew at its slowest pace since March 2022, at 9.7% year-on-year. This figure fell short of analyst expectations and signalled a potential slowdown in credit absorption.
Further worrying indicators include a decline in outstanding yuan loans growth (10.6% year-on-year) to its lowest level in over two decades, and a drop in December’s total social financing (TSF) figure to 1.94 trillion yuan, below analyst forecasts.
While the PBOC’s aggressive lending spree has bolstered headline lending figures, its effectiveness in reviving a sluggish economy remains uncertain. The challenge lies in directing credit towards productive sectors and boosting consumer spending without reigniting unsustainable asset bubbles. The central bank’s manoeuvring in the coming months will be crucial in determining whether China can navigate these headwinds and achieve its elusive growth targets.