China’s annual economic growth rate is expected to drop to under 5% in 2024. There are signs in the financial markets for this expectation. Finance includes direct finance and indirect finance; indirect finance refers to banking deposit and loan business which can be further divided into consumer finance and corporate finance. Due to the real estate prices slump, affecting the demand for consumption and loan, consumers postpone their large consumer spendings because of the loss of net worth in household assets and the expectation of continued prices falling. And the enterprises reduce banking finance because of decreasing demand for effective consumption, slowing down shipment, increasing inventories and temporarily suspending expansion of production line.
The indicator of indirect finance in China is the “aggregate financing to the real economy” which records the financing amount borrowed by non-financial businesses and households from the financial sector monthly. It includes loan of renminbi (RMB), loan of foreign currencies, loans, trust loan, non-discounted banker’s acceptance bills, corporate bonds, etc. This index covered local government special bonds in September 2018, and national bond and local government bond were merged as government bonds in the end of 2019. Reviewing the data of “aggregate financing to the real economy,” its annual growth rate mostly shows a V-shaped change because of seasonal effects and fluctuations in base periods. It’s the same in 2023, with the lowest rate at -45.28% in May and 23.74% in November. However, the amount of real estate spending and equipment investment still dropped in November for 30% from the previous month, showing a decline monthly growth rate.
With a cooling loan demand, the supply of funds therefore emerges, leading to a decline in interest rate. The People’s Bank of China has continuously cut the interest rate and reserve requirement since 2020, making the one-year RMB Loan Prime Rate (LPR) at 3.45%, and over 5-year at 4.2%. According to the Nikkei’s Chinese Web, data from the People’s Bank of China shows that the incremental loans over one-year has kept a monthly jagged descent since January 2023. China’s domestic banks hold 65% of it national bonds and 87% of local bonds, reducing the possibility of external overseas default of bond repayments.
The expansion of economy slows down with less banking finance, and China’s economic growth rate will enter a “normal time” starting from 2024. The Nikkei estimates that the real estate market has been in recession since 2021 because of excessive support of banking system to the real estate developers in the past. If the Beijing government plans to actively repay debts and accelerate infrastructure contraction, it may lead to a financial crisis in 2027. By then, the exchange rate between yuan and dollar will depreciate from 9 yuan to 1 dollar, breaking the 8.2 yuan to 1 dollar when the exchange rate reform started in July 2003. And this change will cause grave concerns and interference from the US Department of Commerce.
The US echoed the proposal from Kuroda Haruhiko, former Governor of the Bank of Japan and strongly asked for the appreciation of RMB to balance the trade deficit between China and US. In the bilateral meeting on US-China exchange rate in Paris, the US pledged to include RMB into the Special Drawing Rights (SDR) basket of the International Monetary Fund (IMF) after China’s exchange rate reform, making it one of the five reserve currencies. The exchange rate between yuan and dollar started to appreciate slowly from 8.3 yuan to 1 dollar on July 1, 2005. But the pace and magnitude of appreciation are not large enough, the US-China trade deficit had reached $136.8 billion dollar by the first half of 2007. The US enterprises strongly clamored for actions from the Bush Administration to make yuan’s appreciation. The yuan was at 6.04 against the dollar on February 14, 2014, and then the appreciating trend began to turn down. The US proposal to IMF was approved in 2015 and Chinese yuan became one of the reserve currencies together with US dollar, Euro, Japanese yen, and British pound in October 2016. The five reserve currencies are accepted for global trade settlement.
According to the statistics of the Central Bank of Taiwan, the balance of the Central Bank’s RMB reserves was 133.284 billion yuan in the end of November 2023, a record low in 10 years. The Central Bank has reduced its holdings of RMB significantly in the past 16 months calculated monthly. The balance of RMB deposits in designated Domestic Banking Unit (DBU) was 102.405 billion yuan, a reduction of 4.415 billion yuan monthly. The balance in Off-shore Banking Unit (OBU) was 30.879 billion yuan, an increase of 894 million yuan monthly. Either in total or subtotal amounts, the figure remains the lowest since 2013. It reveals that the Central Bank is also reducing its holding of RMB, and the willingness of holding RMB in the market is decreasing.
The Central Bank opened the RMB deposit services in Taiwan in February 2013 and it surged to 155 billion yuan in the first year, peaking in October 2014 at the amount of over 300 billion yuan. Taiwan has kept the RMB deposit over 300 billion yuan ever since until 2018 when the US-China trade war broke out. After the US-China trade war in March 2018, RMB lost its charm and the deposit balance kept decreasing. The US Federal Reserve Board (Fed) started an interest rate hiking cycle in March 2022, RMB has been replace by US dollar and its deposit balance began to fall under 200 billion yuan.
If the willingness of holding RMB turns weak, then the exchange rate will be relatively weak, reducing the willingness of global central banks to hold RMB reserve. International investment banks will also lose interests in China’s stock market and assets while China’s domestic funds will seek overseas investment opportunities. If this trend continues to deteriorate, a financial crisis might break out in the end of 2029. During this process, the annual growth rate of China’s GDP could drop from 4.5% in 2024 to under 3% in 2027. Once it happens, the annual GDP growth rate will continue dropping to 2% in 2035. It would be a huge difference from what China has set for its current economic development, per capital GDP exceeding $20,000 dollar in 2035. It is noteworthy that the global economy and trade will be seriously affected if China’s economy keeps this way, and the global economic growth rate is expected to drop 0.7% to 1% annually.
(Chiu Chih-Chang, Associate Professor, Department of Statistics, Tamkang University)
(Translated to English by Tracy Chou)
