China's economy faces deepening issues as lending and borrowing decline significantly, with total social financing down 11% from the previous year in Q1 2024.
Recent data from the People’s Bank of China (PBOC) indicates a concerning decline in lending and borrowing, highlighting deeper economic issues within the nation. In the first quarter of 2024, total social financing - encompassing bank and non-bank financing - reached 12.93 trillion yuan ($1.78 trillion), marking an 11 percent decrease from last year's equivalent period.
The lending shortfall, particularly in the context of central bank liquidity provisions, points to a demand deficit rather than a supply issue. The PBOC reported that the broad M2 measure of money supply grew by 8.3 percent over the 12 months ending in March, a slight reduction from February's 8.7 percent but still an expansionary figure. Nevertheless, the financing essential for economic growth continues to contract.
A significant contributor to the diminished demand is China's ongoing property crisis, which began to unfold in 2021 with the Evergrande crisis. Construction activity and home sales have drastically fallen, with a 33 percent decrease in construction and a 30 percent drop in home sales compared to the previous year, as reported in February. Millions of potential homeowners face uncertainty with prepaid apartments that may never be completed due to developer defaults.
The property sector's collapse has also cast doubt on the health of the broader financial system, with banks holding substantial amounts of dubious debt. This has led to a reluctance among lenders to engage with borrowers, creating hesitancy and reducing financial market efficacy in supporting economic growth.
In light of these challenges, the PBOC's incremental interest rate cuts have provided limited stimulus. Despite reducing key interest rates five times in the past year, real interest rates have effectively risen due to a shift from modest inflation to modest deflation, further discouraging borrowing.
The central bank's cautious approach, coupled with delayed government response to the property crisis, has allowed financial issues to deepen. Although Beijing eventually offered support for unfinished properties, the commitment is viewed as insufficient, representing just over 5 percent of the initial Evergrande losses and not accounting for the broader developer failures since.
The current state of China's economy reflects the ongoing struggle to stimulate demand and manage the fallout from the property sector. The potential future implications suggest that without more decisive action, both in monetary policy and in addressing the property crisis, China's economic recovery may continue to face significant headwinds.
