Time to change monetary policy

By Ma Jun
0 Comment(s)Print E-mail China Daily, July 18, 2013
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China's social financing volume has increased rapidly in the past 10 months, but it has not been transferred to the real economy for several reasons. Factors such as high financing costs and rapid currency appreciation have made banks and businesses lose confidence in the real economy and thus obstructed the circulation of money. Also, rampant arbitrage has resulted in over-estimation of the social financing volume and thus the growth rate.

Moreover, the "net increase" in the flow of money into the real economy through social financing has also been overestimated, because some enterprises and local governments use it to get additional loans to repay old loans.

Premier Li Keqiang has said the stock of money and credit has been unleashed and activated in response to the recent decline in circulation of money, which can be attributed to investors' and consumers' lack of confidence in the real economy.

If the "cash crunch" in inter-bank loan market cannot be overcome soon, enterprises, banks and other financial institutions will start hoarding more liquidity, which, in turn will further obstruct the circulation of money, creating larger amounts of idle funds. As experts will tell us, considering a cash crunch to be a constant risk, banks tend to invest more funds in high-liquidity assets in order to prevent abrupt liquidity squeeze in the future.

Also, a lingering cash crunch will make it difficult for enterprises to get financing and prevent them from starting new projects in the real economy. Consequently, the demand for loans from the real economy will fall.

The cash crunch has substantially increased the yields of some short-term wealth management products, enticing some financial institutions into indulging in arbitrage. Quite a few financial institutions and enterprises have dropped their plans to issue bonds, which will cause a decline in the flow of funds from the bond market to the real economy.

Many people fear that the cash crunch will stem the growth of bank credit, projecting a gloomy outlook for enterprises as far as new orders are concerned - which again will slow down the circulation of money.

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