CASS vice-president: China facing severe balance sheet recession

context: Official PRC media are generally upbeat in H1 2023, but the policy reversals of Q4 2022 make this appear to many as whistling in the dark. 'Vigilance against the impact of the balance sheet’ is called for by the 'abnormal trend of financial data,' warns Li Yang, CASS (Chinese Academy of Social Sciences) vice-president. 
Phenomena typical of balance sheet shocks have now appeared, said Li Yang 李扬 CASS vice-president and Finance and Development lab chair at the 8th China Bond Forum (6 Jan 2023), noting 
  • non-financial economic entities ’expect to weaken’ to varying degrees and choose to ’lay flat’
  • in the financial sector, the abnormal performance in 2022 was the increase in money supply and loose liquidity
  • the financial sector has reduced revenue and increased expenditure, resulting in increasing deficits and debts

Now facing the risk of a balance sheet recession, said Li, we will have to make great efforts to resolve it in the near future. The PRC bond balance exceeded CN¥141 trillion in late December 2022, he notes, though China is still the world’s second-largest bond market. He pointed out

  • the total market value of stocks was C¥79.36 trillion; the bond market was already stronger than the stock market in terms of market depth and financing function
  • however, while the total amount of bonds is expanding, the net financing amount of non-financial corporate bonds has declined year by year in the three years hit by the epidemic
  • this provides further evidence that the PRC economy is already facing the impact of a severe balance sheet recession

That the proportion of fiscal revenue in GDP has declined is the biggest problem worthy of attention, Li said. The proportion of the PRC’s fiscal revenue to GDP began to decline in 2016; it has now dropped to a level equivalent to 17.7 percent of GDP. Li hence suggested that economic recovery requires comprehensive measures

  • restore confidence and normal economic order; we are in a difficult recovery process
  • there is an urgent need for top-level design to 
    • strengthen coordination of fiscal and monetary policy
    • coordinate real estate policy and other macro-control policies 
    • measures must form a positive synergy