China’s economic growth is close to the potential output, which means that the former is actually
approaching the latter. Hence it is safe to say that resource mobilization and economic
mobilization in China are relatively efficient, and our unemployment rate is not high and few
resources are left idle. Meanwhile, China’s economic growth remains resilient. Over the past 12
quarters, the economic growth rate has ranged between 6.7% and 6.9%. The overcapacity
problem has been evidently alleviated, and a basic balance has been achieved between the
supply and the demand. As you can see, there is a blue line and a red line in this figure. The blue
line represents the y-o-y growth of manufacturing investment, and the red line stands for the y-oy growth of the GDP.
When the y-o-y growth of manufacturing investment is higher than that of
the GDP, the production capacity is growing. You can see that the blue line lies below the red line
for some time, and this shows that during that period, overcapacity can be alleviated as the
growth of manufacturing investment is relatively slow. This can also be reflected by enterprises’
profit gains: when enterprises secure satisfactory profits, they tend to invest more; and when
they are experiencing profit downturns, they will invest at a slower pace. Private-sector
investment is particularly sensitive.
Overall, China’s economic growth is strong, stable and resilient. Recently, the downward
pressure on the economy has mounted, and the growth of off-balance-sheet financing has
slowed down significantly. The blue line and the red line in the figure represent the growth rates
of entrusted loans and trust loans, respectively. As we can see, entrusted loans and trust loans
grew significantly in 2016 and 2017, but the bar chart indicates that both loans have registered a
negative growth since the beginning of this year — which means their increments are
decreasing. The green line stands for the y-o-y growth of infrastructure investment, and it can be
seen that the decreasing growth of off-balance-sheet financing is highly correlated with the
declining growth of infrastructure investment. Infrastructure investment may be partially financed
by entrusted loans and trust loans. Therefore, if financing is cut, the construction of these
projects and programs will slow down.
In response to the changes in economic operation, we have undertaken forward-looking preemptive adjustments and fine-tuning of the monetary policy this year. The PBC reduced the
4 / 15 BIS central bankers' speeches
required reserve ratio (RRR) four times, which freed RMB 3.65 trillion capital in total, and
unleashed RMB
1.76 trillion of liquidity in the market via the MLF. All these measures were taken
to provide stronger support for the real economy and ease the investment contraction as a result
of economic cycle. Meanwhile, regulatory policies and some other management requirements,
such as the purge of local government debt, can also give rise to investment contraction.
Through RRR cuts and MLF, we can supply liquidity, offset cyclical investment contraction and
ensure the stability of economic operation.
Recently, the difficulties that private enterprises are faced with in securing financing become
more prominent. Here I’d like to present the statistics of credit, bonds and equity. For example,
the loans obtained by private enterprises from the credit market this year has climbed more than
5% from 2017, which is relatively slow. In terms of bonds,
this year also saw a decrease in bond
financing of private enterprises, which showcases enterprises’ difficulty in securing bond
financing. Equity financing also registered a decline. Meanwhile, some private enterprises have
become bond defaulters. In the first eight months of 2018, there were 22 enterprise bond
defaults, 18 of which were made by private enterprises, involving more than RMB 50 billion.
These statistics show that it is difficult for private enterprises to access financing.
To deal with this problem, the PBC has introduced a policy mix of “three arrows” targeting at
smoothing the three major financing channels I mentioned just now. The first arrow is to enhance
credit support for private enterprises. We work to support commercial banks in issuing loans to
small and micro businesses (SMBs) and private enterprises by increasing the quota of central
bank lending and central bank discount and adjusting the parameters in the MPA system.
The second arrow is aimed at relieving the difficulty faced with private enterprises in issuing
bonds. The tool can serve as a guarantee to enable private enterprises to issue bonds.
Moreover, the negative effects of the three financing channels, i.e. credit, bonds and equity, may
reinforce each other. Why are commercial banks unwilling to purchase bonds issued by private
enterprises? That is because they are worried about possible bond defaults. Commercial banks
will be held accountable if a private enterprise defaults on the bonds they have purchased.
Therefore, people in commercial banks are concerned about the potential risks of private
enterprises. However, if private enterprises cannot issue bonds, they will lose access to liquidity,
which will then lead to credit problems and further undermine commercial banks’ willingness to
issue loans. Why? Because commercial banks are aware that such enterprises have run out of
money and have difficulty in loan repayments. As a result, they dare not to lend money to these
enterprises. Hence if enterprises cannot issue bonds, they will not be able to secure loans. To
make matters worse, banks that have issued loans may even accelerate the collection of
payments once they find a private enterprise at fault. As we know, failed bond issuance will
usually be made known to the public. If a listed company fails to issue bonds, the news will be a
blow to its share price. Since many private enterprises use shares as collaterals to borrow
money from banks, it will be harder for them to secure loans when their share prices plunge.
Meanwhile, in this case, commercial banks will ask them to increase collaterals. Therefore, it can
be concluded that the negative effects of the three financing channels can affect and reinforce
each other.
Among the three channels, bonds and equity are more transparent than credit. In terms of loan
issuance, commercial banks and private enterprises need to sign one-to-one agreements, while,
by contrast, the bond and share issuance information of private enterprises is known to the entire
market. So we choose bonds to be the breakthourgh in a bid to address this issue.
What we do
is to provide bonds with insurance, so as to help private enterprises issue bonds smoothly. Then
the successful bond issuance becomes a piece of good news. After knowing that bonds have
been issued, commercial banks will understand that the enterprises have secured money and
stop urging them to pay back loans. When the stock market receives the message of bond
issuance, the share price of such enterprises will probably take a favorable turn. This is the
reason why we have decided to choose bond issuance as the breakthrough in easing the
5 / 15 BIS central bankers' speeches
financing difficulty of private enterprises.
