Latest Statement from Pancheng Pan, Governor of the People’s Bank of China: Why “Fewer Loans” Does Not Mean “Tight Money Supply”?
Hello everyone, I’m your financial observer. Recently, there has been a growing concern in the market: “Why do it seem that banks are lending less? Is the financial support for the real economy weakening? Is there a shortage of funds?”
On September 16th, Pancheng Pan, Governor of the People’s Bank of China, published a significant article that clearly addressed these concerns, emphasizing that we cannot simply use the “loan growth rate” as an indicator to measure the strength of financial support for the real economy.
It’s like how we used to judge someone’s health by how much rice they ate; now we realize that even though they eat less rice, if they consume more vegetables, fruits, and protein in a balanced way, their health may actually be better.
Below, I will break down this article into five key points to help you fully understand the profound changes happening in China’s financial system.
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1. Core Message: From “Focusing on Total Amount” to “Focusing on Structure”
In one sentence: China’s finance is undergoing a transformation and shifting gears. The old model, where the real economy relied on real estate and infrastructure projects for loans, is ending. A new model is emerging, where technology and green industries are driving growth through equity and bond financing. Therefore, a slowdown in loan growth is a normal and even positive phenomenon, as funds are flowing to more efficient areas.
- Background: There were concerns about a “credit slowdown” and a potential collapse in financial data.
- Response: Governor Pan pointed out that this is a natural result of economic restructuring.
- New Direction: This sets the tone for the 14th Five-Year Plan, emphasizing a balance between direct financing (through stocks and bonds) and indirect financing (bank loans).
- Conclusion: A slowdown in loan growth, accompanied by improved quality, will become the new norm, and this will be the new standard for evaluating the health of the financial system.
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2. Deep Analysis 1: Why More Loans Were a Good Sign in the Past, and Why Fewer Loans Are Normal Now?
To understand this change, we need to grasp the concept of “loan density.”
- The Past (High Loan Density): The Chinese economy relied on real estate, infrastructure, and traditional manufacturing. These industries required large investments and had tangible assets (such as land and buildings) as collateral.
- Data: For example, in the transportation industry, for every 1 yuan of value created, there might be 3.3 yuan in loans; in the real estate sector, it was 1.7 times that.
- Result: Banks favored these clients because the collateral was sufficient, and the risks seemed controllable, leading to large loan volumes.
- The Present (Low Loan Density): The economy now relies on technology, high-end manufacturing, and green energy. These industries are less tangible and rely more on technology, talent, and patents.
- Data: For example, in the information services industry, for every 1 yuan of value created, there are only about 0.1 yuan in loans.
- Result: These companies need less bank loans and rely more on venture capital (VC/PE), initial public offerings (IPOs), or bond issuance.
In simple terms: In the past, building houses required borrowing a lot of money for materials; now, developing chips requires investing in talent and time. Using the amount of loans as a measure of a company’s success is no longer accurate. The decrease in loan ratios is due to changes in the economic structure, not a lack of bank activity.
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3. Deep Analysis 2: The “Main Force” of Financing Has Changed, with Direct Financing Surpassing Loans for the First Time
This is a historic shift. For a long time, Chinese companies relied mainly on bank loans for financing. But now the situation has changed:
- Key Data: Before 2013, over 80% of new social financing came from bank loans. By 2025, the combined proportion of corporate bonds, government bonds, and stock financing is expected to exceed bank loans for the first time.
- What Does This Mean?
1. Risk Diversification: Risks are no longer solely borne by banks but are spread across the stock and bond markets, shared by thousands of investors, making the financial system more stable.
2. Better Fit for Innovation: Tech startups, which carry high risks, are not easily financed by banks, but venture capitalists (VCs) are willing to invest because of potential high returns. Direct financing (such as IPOs) is more suitable for these high-risk, high-return ventures.
3. Bank Role Transformation: Banks are no longer just lenders but are becoming comprehensive financial service providers, helping companies issue bonds, offering investment banking services, and providing full-cycle support.
In simple terms: In the past, everyone went to the same “big cafeteria” (banks) for loans; now, people are going to various specialty restaurants (stock and bond markets). The cafeteria (banks) is still important, but it’s no longer the only option, and it’s also offering new services.
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4. Deep Analysis 3: How Will Monetary Policy Change? From “Controlling the Amount” to “Adjusting the Temperature”
Since loans are no longer the only indicator, how will the central bank manage money supply? Governor Pan outlined a new framework for monetary policy: “Emphasizing prices over quantity.”
- Reducing the Focus on Quantity: The central bank used to closely monitor indicators like M2 (broad money supply) and loan growth rates, like controlling the flow of water from a faucet.
- New Approach: These indicators are now more for observation and reference. The central bank no longer focuses on setting specific loan targets but on the overall financial environment.
- Reason: The total social financing volume is already very large (over 460 trillion yuan). Pursuing high growth rates could lead to money circulating within the financial system without reaching the real economy, increasing leverage and causing problems.
- Focusing on Prices: The central bank will focus on interest rates, allowing them to form naturally to ensure reasonable funding costs.
- Goal: To make the interest rate mechanism more efficient, ensuring that funds flow to where they are most needed.
- Addressing Inefficient Practices: The central bank aims to reduce competitive pressures and inefficient capital circulation within the financial sector.
In simple terms: The central bank is no longer just a strict water supplier but a temperature regulator, ensuring that interest rates are appropriate to support economic growth without causing unnecessary inflation or waste of resources.
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5. What Does This Mean for Individuals, Businesses, and Banks?
This transformation affects us all:
- For Banks: The era of earning profits from interest margins and mortgage loans is over. Banks need to improve their expertise in helping companies issue bonds, provide equity investments, and offer consulting services. Evaluation criteria will shift from loan volumes to loan quality, turnover efficiency, and risk-adjusted returns.
- For Businesses: There are more financing options, but they require a higher level of professionalism. Traditional industries can still get loans, but interest rates and terms will be more market-driven. Tech and light-asset companies have more opportunities, but they need to be financially transparent and meet the standards of professional investors.
- For Individuals: Investment options are becoming more diverse, but there is a greater need for financial literacy. Bond, fund, and stock investments are becoming more important. Bank deposit rates may remain low as banks seek to reduce their debt costs. However, these investments carry higher risks, so individuals need to be more cautious and understand the risks involved.
- For the Economy: A slower growth in the total amount of finance helps control the macro leverage ratio (the country’s debt level), preventing waste of resources and inefficient capacity buildup, leading to a healthier and more resilient economy.
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Conclusion
Governor Pan’s article sends a clear message: There’s no shortage of funds; rather, finance is becoming more sophisticated. China’s finance is moving away from extensive growth towards more targeted and efficient allocation. A slowdown in loan growth is not a sign of economic decline but a necessary part of structural adjustment.
For individuals, it’s important to:
1. Not rely solely on bank loan rates to judge economic health.
2. Pay attention to the activity in the capital markets (stocks and bonds), as they reflect the vitality of the new economy.
3. In the future, both business financing and personal investments will require a more professional approach, as the era of simple, aggressive strategies is over, and a more refined and targeted one has begun.
This is the core logic of China’s current financial transformation: Optimizing the structure > Expanding the total amount > Improving efficiency > Achieving sustainable growth.