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China Announces Change in Lending Policy To Accelerate Nation’s Physical Economic Growth

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EIRNS—Pan Gongsheng, Governor of the People’s Bank of China (PBC), the nation’s central bank, announced January 24 a series of bank measures to boost banking lending in order to extend China’s physical economic growth through 2024 and beyond.

Pan announced that the PBC will cut the reserve ratio requirement that Chinese commercial banks must maintain, from approximately 7.4 to 7 percent, which should free up approximately 1 trillion yuan or $140 billion to be injected into the economy by bank lending. What this means is the following: let us assume a Chinese commercial bank holds 1 billion yuan in deposits. Under the current level, this bank must put aside reserves of 76 million yuan, to cover the situation in which something could go wrong with those deposits. Therefore, the Chinese bank can only lend 924 million yuan. If the reserve requirement is lowered to 7% of deposits, then the bank will put aside 70 million yuan in reserves, and can lend 930 million. Applied across the banking system, this will free up an extra 1 trillion yuan for lending and injecting into the economy.

The PBC also proposes to lower the rediscount interest rate for lending to agriculture from 2 % to 1.75%, making it less expensive to borrow for agriculture and farming. All these changes go into effect Feb. 5.

Two points are noteworthy: first, for the last few years, the Chinese have preferred, for the whole economy, to adjust the reserve requirement level, thus avoiding, the practice in the West of lowering interest rates to zero, setting off speculative ’booms;" then jacking them up to 5 to7%, wiping out companies; then bringing them down towards zero again, and so forth. Second, the cutting of reserve requirement ratios is not dictated by the City of London or Wall Street, but by the sovereign Chinese government, giving them much more control.

Moreover, this is done in a dirigistic, growth-oriented fashion, coordinated with the country’s large banks. The world’s four largest banks, classified by asset size, are all Chinese: Industrial and Commercial Bank of China Limited ($6.1 trillion in assets); the Agricultural Bank of China ($5.35 tn in assets); China Construction Bank ($4.98 tn in assets), and Bank of China (not to be confused with the PBC central bank) ($4.42 tn in assets). In fact, of the world’s top thirty banks by asset size, ten—or one-third—are Chinese. JP Morgan Chase, HSBC, Deutsche Bank may strut around all they want; they are no longer largest. The bank policy change announced by PBC’s Pan on Jan. 24, would normally have been pre-cleared with the big banks.

Furthermore, such a policy change would be first debated out and approved by the State Council, which is the executive authority of the People’s Republic of China, where intensive discussion takes place. It would further be discussed by the National Development and Reform Commission, where economic policy, both domestic and foreign, is thrashed out. China does not have a Hamiltonian bank, as such, but it is the interaction and coordination of the State Council, the NDRC, the big state-owned banks, and Xi Jinping, which function as a Hamiltonian credit policy apparatus.

In 2023, China’s GDP grew by 5.2%, according to the release of the National Bureau of Statistics of China (NSBC) on January 17, compared to the U.S., where GDP grew by 2.5% in 2023, and that of Europe which grew by 1%. As a measure, GDP is quite limited. According to the NBSC, in 2023, the total value added of China’s industrial enterprises rose by 4.6%, and that of manufacturing, by 5%, compared to 2022. China is the world’s largest industrial producer. Corrected Investment in fixed assets grew by 6.4% over the previous year. China has been aiming at a 5 to 6% physical growth rate for the last few years. In 2023, China’s foreign trade was $5.93 trillion, the world’s largest. This is coordinated with the Belt and Road Initiative, and the BRICS.

China’s dirigistic credit and physical production policy works. [ref]