Diverging Approaches to Supporting Growth: The Cases of Jiangsu vs. Guangdong

With the Chinese economy continuing to slow throughout the first half of 2019, attention has focused on how the central government might buoy growth. However, that is complicated by variations in economic conditions among regions and the different ways in which the financial sector deals with those variations. Understanding how banks have responded to the slowdown at the local level provides both a more nuanced picture of China’s challenges and the difficulty Beijing faces in crafting optimal policy responses to stabilize growth.

For example, in Guangdong and Jiangsu—the two largest provincial economies—credit growth has taken on very different characteristics. Those differences suggest that Jiangsu’s banks may be more risk averse than those from their southern counterparts, and that the Jiangsu economy may even be under more stress. (I have previously written about how bad loan disposals in Shandong and Zhejiang—the third and fourth biggest provincial economies—resulted in different economic outcomes.)

Overall, Guangdong and Jiangsu have enjoyed relatively robust growth in bank credit this year. At the end of June, outstanding bank loans in Guangdong and Jiangsu were up 16.4% and 14.8%, respectively, from a year earlier, compared to 13.2% growth nationally. However, the two provinces diverge over the type of loans being disbursed and the degree to which they rely on shadow banking.

Bank loan growth in Guangdong has been led primarily by an acceleration in medium- and long-term corporate loans, which typically support investment and general economic growth. Meanwhile, in Jiangsu, growth in this type of loan slowed and stayed well below the national pace (see Figure 1). Lending in Jiangsu was driven instead by the growth of short-term corporate loans, which are mainly used to meet working capital needs. In contrast, short-term corporate lending in Guangdong barely increased at all, which was in line with the national trend (see Figure 2).

Figure 1. Moving in Opposite Directions
Growth of medium- and long-term bank loans to non-financial companies.Source: PBOC, Wind, MacroPolo.

Figure 2. Growth of short-term bank loans to non-financial companiesSource: PBOC, Wind, MacroPolo.

The data from Jiangsu might partly be explained by the partial migration of demand for long-term loans from banks to the bond market, with bond market issuance in Jiangsu significantly larger than in Guangdong. But the divergence in shadow banking trends suggests other factors are behind Jiangsu’s shift.

The core components of shadow banking—namely trust loans, entrusted loans, and undiscounted bankers’ acceptances—all contracted in Guangdong in the first half. In Jiangsu, entrusted loans growth fared as badly as in Guangdong, although trust loans saw a modest bump. However, undiscounted bankers’ acceptances surged, with the net increase in outstanding acceptances almost twice that in the same period in 2018. In most other provinces, undiscounted bankers’ acceptances contracted (see Figure 3).

Figure 3. Shadow Banking Returns – For Some
Net change in outstanding undiscounted bankers’ acceptances.Note: The PBOC doesn’t provide data on the stock of total social financing components by province. Hence, the data presented here is the flow of new credit issued in the first half of each year.
Source: PBOC, MacroPolo.

Why might China’s two largest provincial economies respond to weakening economic conditions in such divergent ways? I’ve written previously about how the level of discounted bankers’ acceptances has risen nationwide in response to payment distress among firms. Jiangsu’s surge in undiscounted bankers’ acceptances—an increase that was not replicated in any other province—could suggest that payment problems are particularly acute in the province, as companies resort to issuing acceptances in lieu of making timely payments to their suppliers. Meanwhile, rebalancing toward shorter maturity loans—which are safer than the longer-term variety—could signal that Jiangsu banks are reacting to risks they see in the local economy.

Of course, it’s difficult to draw firm conclusions from credit data alone, especially as headline GDP growth remains healthy in both provinces. For instance, Guangdong’s economy registered 9% growth in the first half year-on-year, and Jiangsu 8.3% over the same period, according to the National Bureau of Statistics. However, Jiangsu is clearly relying more on shadow banking at a time when shadow banking elsewhere in the country remains under significant pressure. Moreover, Jiangsu’s shift toward short-term lending suggests that banks may be prioritizing safety when making lending decisions.

Whatever the reason, it seems clear that China’s two largest provincial economies are responding differently to downward pressures, creating a more complicated environment for regulators and observers to make sense of.