Monetary easing 'no answer' to loan woes

PBOC official says statistics don't give full picture of credit conditions

China's liquidity is ample, and simply easing monetary policy won't help cash-starved private companies, a central bank official told a symposium on Tuesday.

Wang Yi, deputy director of the statistics and analysis department at the People's Bank of China, challenged the conventional wisdom that tight monetary policy in China is driving up financing costs for the private sector.

Broad money supply, or M2, was up 12.1 percent year-over-year as of March 31, down from the expansion of 13.3 percent in February. This deceleration, along with the slower growth of total social financing - the broadest measure of credit - has been cited by many as proof that the PBOC is tightening credit.

But Wang pointed to flaws in the official statistics, which he said underestimate actual money supply. He said "massive" amounts of money have been transferred out of non-deposit-taking financial institutions, and these funds weren't counted in M2. In addition, fiscal deposits were excluded from the M2 calculation.

If these two factors were added, the growth of M2 should be about 14 percent, instead of 12.1 percent.

"Because of rapid innovation in financial products, many wealth management products, trusts and money market funds have moved beyond the scope of M2," he said.

Similar comments were made last week by Pan Gongsheng, a deputy governor at the central bank. Pan said that the financial sector has introduced so many innovative products in recent years that it has become much more difficult to calculate money supply.

Ample credit was also reflected in figures for new loans, according to Wang. New yuan loans in the first quarter reached 3.01 trillion yuan ($483 billion), up 259 billion yuan year-on-year.

But a lot of that credit remained within the financial system. Wang noted that China's interbank borrowing has tripled from levels before the 2008 global financial crisis, and interbank assets now stand at nearly 16 percent of commercial banks' total assets. That's much higher than in Western markets.

To circumvent regulatory limits, commercial banks have undertaken massive interbank lending activities in recent years. Meanwhile, depositors were lured by higher returns from new financial products, so banks' deposit growth slowed and prompted them to be more conservative about lending.

These factors have constrained credit to private corporate borrowers, driving companies into alternative channels and driving real borrowing costs sharply higher.

"Interest rates for some private financing channels have reached 30 percent. What kind of investment could have a return rate of more than 30 percent?" asked Li Yang, vice-president of the Chinese Academy of Social Sciences, a central government think tank.

"The United States has a 0.25 percent benchmark interest rate, but Federal Reserve officials are still complaining the lending rate is too high," Li added.

Chinese officials and economists are aware of the distress in the private sector caused by high rates, but they're also worried that loosening credit will exacerbate the country's already-high leverage.

The total credit-to-GDP ratio reached 215 percent at the end of 2013, according to Standard Chartered Plc.

Wang said abundant problems in the real economy should be solved before the difficult access to credit can be addressed. Without substantial reform, any credit easing is meaningless.

"If local government financing vehicles can still bear the high rates, and property developers can still borrow from trust companies at high rates, and State-owned enterprises still grab the majority of loans, private companies' financing difficulties can't be resolved," Wang said.