What to Expect From China in the Year of the Snake
On the economic front, reacceleration seems likely. GDP growth bounced to 7.9% in the fourth quarter 2012, and January's combination of slowing inflation and a 15.9% increase in M2 money supply suggests the economy's in a "Goldilocks" sweet spot: Money, it seems, is flowing quickly enough to support continued growth, but slowly enough to keep the risk of runaway inflation in check.Looking ahead, money should continue moving, though perhaps not at a gangbusters rate -- the official 2013 loan quota is reportedly 8.5 trillion yuan, which implies a slight deceleration in loan growth.
But bank lending is only one driver of money supply. As China liberalizes its financial system, total social financing --which includes bank lending as well as peer-to-peer lending, corporate debt issuances, shadow banking and more -- is becoming an increasingly important measure. In January 2012, new yuan-denominated bank lending comprised 736 billion the month's 980 billion yuan in total social financing. But in January 2013, after a year of financial sector reforms, new yuan-denominated bank lending of 1.07 trillion was less than half the 2.54 trillion yuan in total social financing.
This widening discrepancy suggests China's efforts to expand corporate borrowing options have had some success. Recall, one reason China's economy didn't reaccelerate as quickly as officials hoped in 2012 was small businesses' difficulty securing financing.
Looser loan quotas were supposed to benefit the entire economy, but the banks, which are mostly state-run, lent primarily to state-owned enterprises, or SOEs, shutting out many smaller, private firms. In the past, this wouldn't have been a huge headwind, as China's 144,000 SOEs were its primary growth engine.
But the private sector has grown rapidly in recent years, from 23.5 million in 2004 to over 40.6 million today. Because most of these firms couldn't get bank loans, they had an unenviable choice between stagnation and borrowing from loan sharks at credit card-like rates in order to invest and expand. This made growth exceedingly difficult for most Chinese business owners last year.
Policymakers seemed to realize this last spring and unleashed a series of reforms to widen corporate bond markets, hoping state-owned firms would shift their primary financing means from bank loans to bond markets. They also launched pilot programs to liberalize off-balance sheet lending and peer-to-peer financing in the coastal city of Wenzhou, providing private firms cheaper, legitimate financing alternatives (plans to roll this out nationwide are pending). Hence why social financing grew throughout the year, likely contributing to the fourth-quarter reacceleration.