Another red flag signals trouble in China’s economy. Lending and borrowing continue to decline. The pattern points to the country’s deep economic and financial ills. It is one more signal of Beijing’s challenges and failures.
According to data released recently by the People’s Bank of China (PBOC), total bank and non-bank financing, what the officials at the bank refer to as “total social financing,” amounted to 12.93 trillion yuan ($1.78 trillion) in the January–March period. This is down by 1.61 trillion yuan or about 11 percent from comparable flows in last year’s first quarter. Banks issued 9.46 trillion yuan in loans during the first three months of 2024, also down significantly from the same period in 2023. All figures came in below economists’ expectations.
This shortfall in the kind of financing that the economy needs for growth should trouble the nation’s leadership in Beijing. It is especially problematic because it is happening despite a generous provision of central bank liquidity to financial markets. According to the PBOC, the broad M2 measure of money grew at a reasonably rapid 8.3 percent over the 12 months ending in March, down slightly from the 8.7 percent recorded over the 12 months ending in February but still expansive. Yet the financing of business continued to decline. Clearly, the paucity of lending and borrowing reflects a shortfall in demand, not supply, and that fact points to the most fundamental of economic problems.
Much of this demand shortfall can be traced to the country’s property crisis. It has been festering since 2021, when the great developer Evergrande announced that it could not service its liabilities. Not only has the disappearance of this and other important property developers depressed construction activity—33 percent below year-ago levels at last count in February—but the upheaval has frightened potential homebuyers such that sales of homes have dropped by some 30 percent below year-ago levels at last count in February. Standouts in this sorry picture are the millions of would-be homeowners who took on mortgage debt to prepay for apartments that, because of the failures of these developers, may never be built.
Still, more fundamental problems have emerged. The failures of Evergrande and a long list of other property developers, large and small, have undermined the overall effectiveness of Chinese finance. Many of those who prepaid on now-unfinished apartments have refused to pay the mortgages they took out to make their purchases. Banks and other lenders, accordingly, have a considerable amount of questionable debt on their books. The developers’ failures have also left a legacy of questionable debt throughout Chinese finance.
Under this cloud, potential lenders are more than a little wary of the financial health of any potential borrower. Such doubts also create hesitation in trading and normal daily flows between financial institutions. Something similar happened in the United States during the financial crisis of 2008–09. The upshot in the United States back then and in China now is a diminished ability in financial markets to support economic growth generally.
Against such deep-seated problems, the PBOC’s interest rate cuts have offered little leverage. The PBOC has cut interest rates five times in the past year or so. But each has been a baby step. One of the bank’s key measures, the prime lending rate, has, for instance, fallen only four-tenths of a percent over the entire period. Considering that over the same time, China has seen a modest inflation of about 2 percent a year turn to a modest deflation, the central bank’s cuts have left Chinese financial markets with higher real interest rates than when the bank began its cutting policy. This is hardly an inducement to borrow. Indeed, it is a disincentive. It is little wonder Beijing’s monetary policy has failed to elicit greater economic activity.
Even if the PBOC were willing to move as boldly as circumstances demand, Beijing would still need to respond directly to the property crisis. It would have helped if the authorities had moved quickly in 2021, when the problems first arose. Inaction until 2023 allowed matters time to undermine the workings of financial markets as described. Had the authorities announced immediately that the government would, for instance, backstop the unfinished apartments for which millions of Chinese buyers had already paid, it would have done much to blunt the ill effects of the failures of the property developers. But Beijing did nothing. And when the authorities did act, offering support for unfinished apartments and other sensitive developments, the amounts they committed were inadequate to the need. At last measure, Beijing had put up barely more than 5 percent of the initial Evergrande losses, much less compared to what has occurred among developers since.
