A man walks past a Bank of China outlet in Beijing’s CBD area on Oct. 17. Photo: Chen Mirong/CSST

With regard to the significance of finance to economic development, General Secretary of the CPC Central Committee Xi Jinping once pointed out metaphorically that the economy is the body while finance is the blood; the two coexist and prosper together. The financial industry’s development relies on the real economy, while finance itself is an important component of the national economy. Changes in financial data mirror the real economy’s operational status, which can serve as a barometer and thermometer to gauge economic development. On the other hand, the financial sector also plays a significant role in resource allocation. Financial resource allocation is largely indicative of how efficiently finance bolsters the real economy. Since the start of 2023, despite downward pressures facing China’s macro economy, its financial system has remained robust. Some financial data has even improved, revealing positive factors in the Chinese economy. 

Decreasing financial risks

First, financial institutions have seen their asset quality improve. Non-Performing Assets (NPAs) are a key indicator of financial risks. In the recent period, the situation of NPAs has improved in Chinese financial institutions. Take the banking sector as an example. In the second quarter of 2023, Non-Performing Loan (NPL) balances in Chinese commercial banks amounted to 3.2 trillion yuan, and the NPL ratio was 1.62%. The NPL balance increased slightly by 217.2 billion yuan compared to the end of 2022, yet the ratio decreased by 0.01 percentage point, continuing the downward trend which started in 2021. This suggests an improvement in the quality of assets within financial institutions in China. 

Second, disposal of NPAs has remained intense. Against the backdrop of a macroeconomic downturn, accelerating the disposal of NPAs is crucial to resolving existing financial risks, which has provided guarantees for safeguarding the bottom line of preventing systemic financial risks while enhancing the resilience of the financial system and its ability to forestall risks. Since the beginning of 2023, the momentum of NPAs disposal has remained strong, reserving room for the future development of financial institutions. 

Third, financial risks from the property market have abated. As one of the vital pillars of the national economy, the real estate sector bears greatly on China’s financial system. Into 2023, real estate control policies have eased, and the main tone of the policies is expected to undergo major changes in the upcoming period. Meanwhile, local authorities continue to optimize control policies, such as lifting purchase limitations, lowering the minimum down payment ratio, and providing subsidies to offset taxes on home-buying. These policy optimizations have played a positive role in supporting rigid demand for housing and housing improvement, and in preventing and resolving property-related financial risks, hence containing risks inherent to the real estate sector.

Steady operation of institutions

In 2023, the operational performance of financial institutions has been fairly good. At the end of the second quarter within the Chinese banking industry, the assets of commercial banks totaled 337.52 trillion yuan, up 11.2% from the same period of 2022. In terms of profitability, in the second quarter of 2023, their return of equity and return on assets were 9.67% and 0.75%, respectively. The adequacy ratios of commercial bank capital and tier-one capital stood at 14.66% and 11.78%, respectively. All performance indicators are encouraging, so is the operational performance of securities and insurance institutions. 

Second, the number of high-risk financial institutions has evidently declined. According to ratings of financial institutions in the fourth quarter of 2022, released by the People’s Bank of China on June 30, 2023, banking institutions in China operated steadily in general, with risks controllable overall. Of the 4,368 institutions reviewed, 4,022 were rated Level 1-7, or low-risk, and their assets accounted for 98.3% of the total assets held in all reviewed institutions. This shows that Chinese financial organizations faced very low risks, both in terms of the number of institutions and total assets. 

Regionally, high-risk financial institutions were concentrated in a handful of provinces. There were no high-risk financial institutions in 10 provinces and municipalities, such as Shanghai Municipality and Zhejiang Province, and 13 provinces and municipalities reported single digits of financial institutions with high risks. The number of high-risk financial institutions apparently decreased, dropping by 303, nearly half of the peak in 2019. 

Growing economic support 

China always upholds the supporting role of finance in the real economy, striving to instill financial “running water” into the development of the real economy continuously. First, social financing has maintained steady growth. In the first seven months of 2023, the social financing increment reached 22.08 trillion yuan, an increase of 206.9 billion yuan from the same period in 2022. The social financing stock stood at 365.77 trillion yuan, up 8.9% year-on-year, demonstrating stable growth generally. 

Although the increment was only 528.2 billion yuan in July 2023, lower than market expectations, there is reason to be optimistic. For one thing, cumulative data shows that the social financing increment’s overall growth remained rapid in the first seven months of 2023. For another, new RMB loans hit 3.24 trillion yuan in June this year, increasing by 187.3 billion yuan year-on-year. This is better than expected, dipping into July’s credit demand. Additionally, the decline of July’s increment in RMB loans was mainly attributed to the household sector, while the corporate sector saw a year-on-year rise in newly added RMB lending. The overall credit demand has been steady. 

Second, financing costs for enterprises have continued to go down. The fall in financing costs, a critical component of enterprises’ operational costs, will undoubtedly boost enterprises’ operating returns. Since 2022, China’s monetary policy has remained loose. Abundant market liquidity has led financing costs for enterprises to continue their decline. In June 2023, the weighted interest rate for newly provided corporate loans averaged 3.95%, a decrease of 0.21 percentage point from the same period in 2022. This has perpetuated the downward trend in recent years and continued to bring down enterprises’ financing costs. 

Third, RMB exchange rates has tended to stabilize. The stability of RMB exchange rates is essential to stabilizing prices, holding foreign trade steady, and reducing economic volatility. Microeconomic indicators and the basic balance of international payments imply that RMB exchange rates have not deviated from the reasonable range. Since July 2023, the yuan has stopped depreciating to the dollar, trending toward steady fluctuation. As the dollar’s interest-rate hike ends, the yuan’s devaluation pressure has lessened. RMB exchange rates are expected to fluctuate bi-directionally at a reasonable, balanced level for some time to come. 

Credit structure optimization

As total credit increases, the structure of micro loan provision is also improving, enhancing finance’s efficiency in serving the real economy. First, loan provision has tilted towards the corporate sector. Enterprises are the primary vehicles for wealth creation in economic development. In the first half of 2023, 12.81 trillion yuan of loans were granted to Chinese enterprises and public institutions, up 1.42 trillion yuan year-on-year and accounting for 81.5% of total credit increments. These entities have taken the lion’s share of new loans. 

Second, the structure of industries targeted by corporate loans has been further optimized. In the first half of 2023, new loans from Chinese financial institutions were oriented towards key fields like manufacturing and infrastructure. Real estate loans also renewed growth, and fewer financial resources were distracted from their intended purposes. 

Third, corporate lending has tended to be used for mid- and long-term purposes. At the end of June 2023, mid- and long-term loans for manufacturing soared by 40.3% year-on-year, up 10.7 percentage points compared with the same period in 2022. The growth rate was 22.3 percentage points higher than mid- and long-term loans for all industries over the same period in 2022. Among others, mid- and long-term loans for high-tech manufacturing increased by 41.5%, 11.5 percentage points higher than the same period in 2022. In addition, mid- and long-term loans for infrastructure industries also grew fast, by 15.8% year-on-year at the end of June 2023, up 3.3 percentage points compared with the same period in 2022. 

Fourth, more personal loans have been invested in business development. In the first half of 2023, new household loans mainly flowed to individual businesses. During this period, 2.3 trillion yuan of personal business loans were issued, up 759.3 billion yuan year-on-year. Personal short-term consumer loans grew by 300.9 billion yuan, a year-on-year increase of 401.9 billion yuan. 

Fifth, credit support for disadvantaged groups has intensified. Small and micro businesses, private enterprises, and agriculture-related subjects are disadvantaged in economic development, and credit funds have provided increasing support for these groups in recent years. At the end of June 2023, the balance of various RMB loans from Chinese financial institutions was 230.58 trillion yuan, up 11.3% year-on-year. Among others, the balance of inclusive lending for small and micro businesses was 27.69 trillion yuan, an year-on-year increase of 26.1%. The growth was 2.3 percentage points higher than the rate registered at the end of 2022. The balance of loans for agricultural production and operation was 8.86 trillion yuan, up 18.3% year-on-year. These two types of loans grew faster than all other loans, indicating continued increases in credit support for the disadvantaged groups. 

It is worth noting that financial development is always accompanied by risks. Despite positive changes in certain financial data lately, financial risks still loom large in some areas. Therefore, coordinating financial development and financial security, and leveraging finance’s function in resource allocation while defusing major financial risks, remain the most important tasks to advancing high-quality economic development. 

Li Guangzi is a research fellow from the Institute of Finance & Banking and the National Institution for Finance & Development at the Chinese Academy of Social Sciences. 

Edited by CHEN MIRONG