China’s Credit Contraction Caused by Changes to Banks’ GDP Calculation, Economists Say

In April, China experienced an unusual credit contraction partly due to modifications in the method of calculating the financial sector's GDP, a change that may have long-term effects on financing data, as noted by industry sources and economists [para. 1]. Aggregate financing to the real economy declined by nearly 200 billion yuan ($27.7 billion) last month, marking the first dip since 2017, according to statistics from the People’s Bank of China [para. 2].

This downturn in credit demand has been lingering for months due to weak consumer spending and a protracted property market slump. However, it has also been influenced by additional factors, according to economists [para. 3]. Economists at Nomura Holdings Inc., led by Lu Ting, stated that the drop should not be over-interpreted. They partially attributed the decrease to a recent change in how GDP in the financial sector is calculated, as well as a crackdown by financial regulators on banks that implicitly offer higher rates to attract deposits [para. 4].

Previously, some businesses secured low-interest loans and then redeposited these funds in banks to earn higher interest, artificially inflating both loan and deposit data [para. 5]. The quarterly value added by the banking sector was mainly measured based on year-over-year growth in outstanding loans and deposits. Beginning this year, the National Bureau of Statistics has shifted to metrics relating to banks' profits, such as growth in net interest income, to calculate the sector's GDP [para. 6].

Market sources pointed out that the former method of calculating GDP pushed local authorities to pressure banks into issuing more loans and gathering more deposits, inflating performance metrics for their financial sectors, particularly amid a backdrop of weak credit demand in recent years. As a result, some credit data were skewed, leading funds to remain within the financial system instead of being funneled into the real economy [para. 7].

With this revision, local authorities and banks are now less inclined to distort lending and deposit data. The change's impact will persist throughout the year, and significant fluctuations in credit growth data are expected in the second quarter. The effect should gradually diminish by next year, according to a banker who also suggested that the new financial data would better represent reality [para. 8]. Moreover, the modification is anticipated to lower the financial sector's quarterly GDP growth rates for the year and reduce the banking sector’s overall contribution to economic growth, as mentioned in a recent report by researchers at CIB Economic Research and Consulting Co. Ltd. [para. 9].

For further details, the article includes contacts for reporter Zhang Yukun and editor Joshua Dummer [para. 10].