Efficiency of China's economy 'sliding'

Experts warn that money is flowing slower between different sectors

The efficiency of China's economy is slipping, with money flowing much slower between different sectors than in the past, according to analysts.

They said this is despite the fact that the nation has a considerable amount of social financing - an approach to managing money that delivers a social dividend and an economic return.

Liu Yuhui, director of the financial lab at the Chinese Academy of Social Sciences, a government think tank, said although financing activities in the country appear to be rampant, most of the newly borrowed money is used to repay debts instead of forming revenue among companies.

"We can see that the ratio of money to gross domestic product has been increasing, which means the economy needs increasing capital to promote than previously."

Last year, social financing, which included bank and non-bank loans, bond issuance and stock sales, set a record high of nearly 16 trillion yuan ($2.54 trillion). The ratio of M2, a broad measure of money supply, against GDP stood at a record high of 188 percent at the end of last year.

The proportion of the increase in enterprises' one-year deposits to total social financing dropped to 20 percent in 2012 from 40 to 50 percent seven years earlier, Liu said.

"Accumulation of debts is pushing up the leverage ratio among companies, with the whole economy more difficult to shore up."

He said that by adding loans extended to local governments through financing vehicles, the problem becomes more severe.

Liu estimated local government debt in the financial system at somewhere between 13 trillion yuan and 14 trillion yuan, with interest rates to be paid each year standing at 700 billion yuan to 800 billion yuan.

Rolling over loans has become a widely adopted measure among Chinese banks since last year as lending extended during the financial crisis to stimulate economic growth gradually became due but could not be paid back on time.

According to a survey released by the China Banking Association at the end of last year, more than half of the 850 bankers surveyed said they support the practice of rolling over mature loans, saying this offers a way to ensure projects have good cash flow and that the loans will eventually be repaid following a grace period.

Many banks would rather maintain the lending as long as interest rates could be paid, instead of classifying the loans as non-performing assets, Liu said.

China's M2 growth accelerated substantially to a 22-month high of 15.9 percent year-on-year in January from 13.8 percent in December.

In January, commercial banks extended more than 1 trillion yuan in new loans, and bank off-balance-sheet and non-bank channels offered another 1.5 trillion yuan of new credit to the economy, according to data from the People's Bank of China, the central bank.

Social financing reached 2.54 trillion yuan last month, up 1.56 trillion yuan year-on-year.

The increase in enterprises' deposits in January, which stood at 117.9 billion yuan, was much lower than that of individuals' savings, which stood at 749.9 billion yuan.

Stephen Green, chief China economist at Standard Chartered Bank, warned last year that for an economy with an already high leverage level, "re-leveraging up" increases overall macro risk, as many financial crises are foreshadowed by an increase in leverage.

Zhao Xijun, deputy dean of the school of finance at Renmin University of China in Beijing, said the current monetary condition basically matches well with the economy, judging by the fluctuation of consumer goods and asset prices.

"It's very difficult to measure the impact after the central bank issued money, and controls where the capital flows into. Price levels could be a fair and final criteria to draw a conclusion."

He said the declining proportion of companies' deposits to total financing could also be translated into their increasing involvement in asset transactions as the financial market develops.

Formation of social capital contributed to more than 50 percent of GDP growth last year, maintaining a strong engine for the economy, although probably much of the money went into asset transactions, Zhao said.

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