Inevitable Moderation

In July， Chinas newly added yuan-denominated loans stood at 385.2 billion yuan （$62.67 billion）， the lowest level since 2010. Total social financing declined to 273.1 billion yuan （$44.43 billion）， 1.69 trillion yuan （$274.9 billion） less than the previous month and 546 billion yuan（$88.83 billion） less than the same period last year. The plunge in lending demonstrated by the data can be attributed most obviously to economic slowdown and a faltering demand for financing. But more importantly， it is also a result of Chinas restructuring and the “new normal”of slow economic growth. Indeed， the changing face of the economy means over-expansion of social financing will soon be a thing of the past.

Growth of social financing is bound to abate in the course of Chinas restructuring efforts.

Firstly， the service industry has limited demand for funding. Under the new conditions of Chinese economic growth， the service industry constitutes an increasing proportion of the GDP and will gradually replace manufacturing to become the major growth driver. The demand for financing in the service industry mainly comes from the property market and sector-specific infrastructural construction. However， when the property sector and infrastructure construction are developed to a certain degree， the service sector will exhibit a decrease in demand for financing. According to the Peoples Bank of China， the central bank， mid- and long-term loans to the service industry， excluding those to the property sector， stood at 2.97 trillion yuan （$483.8 billion） as of the end June， which was only 42.6 percent of mid- and long-term loans to the manufacturing industry.

Secondly， investment—as a growth engine—is losing steam， resulting in a reduced demand for funding. Admittedly， investment still plays an important role in maintaining a stable level of growth. However， investmentdriven growth has very limited room to expand in the foreseeable future and will gradually be replaced by consumption， which will lead to a decline in social financing. As of the end of June， yuan- and foreign currencydenominated fixed-asset loans stood at 25.1 trillion yuan （$4.1 trillion）， accounting for 42.2 percent of the total corporate loans. This percentage will further decline following the shift in growth drivers.

Thirdly， social financing will be less important in the kind of innovation-driven economic growth China is now pursuing. The Chinese economy used to grow in an extensive model with capital being a vital production factor. Under the “new normal”of economic growth， technological progress and innovation will play a key role and financing a much reduced one. Innovation-driven companies demand for financing mainly focuses on producing highly competitive products and services.endprint

Finally， loans for consumption have limited room for development in China. The increase in resident income will to a certain extent limit the development of loans for consumption. As of the end of June， loans for household consumption stood at 14.2 trillion yuan （$2.31 trillion）， a large propor- tion of which are loans for housing purchase. Chinese people are not accustomed to spending beyond their immediate means. Using loans for consumption as a growth driver is therefore not realistic in a country with long-standing and deeply rooted saving habits.

In the face of data showing substantial moderation of lending， social financing and money supply in July， we should be mindful of further economic slowdown while at the same time paying close attention to new changes in social financing under the “new normal” of economic growth.

Considering Chinas recent economic history， declines in monthly newly added loans are certainly nothing new. In July 2004 and 2005， there was even a decline in the overall balance of yuan-denominated loans.

The essence of monetary policy should not be how “loose” or “tight” it is， but should be how well it matches conditions in the real economy. As long as the total credit supply is stable and can meet the demands of the real economy， we shouldnt pay too much attention to the decline shown by monthly data. As a matter of fact， in terms of money supply， social financing and loans， China has enough liquidity to back up the countrys economic restructuring and industrial upgrade.endprint