Fixing the Growth of China - Essay Example

Deposits are growing at a slower pace - partly because of the exodus of funds to higher-yielding wealth-management products - and even fell to Y465 billion in April. That makes lending conditions more difficult, especially at smaller banks. The March loan-to-deposit ratio of 83 percent for China's small and midsize banks was already above the 75 percent limit set by the regulator.

In aggregate, though, it isn't clear the banks are short of funds to lend. The level of reserves banks holds above the requirement held steady at 2.2 percentage points in March, up from 0.8 points in the middle of 2011. The seven-day interbank lending rate was 3.2 percent Friday, down from an average of 4 percent in 2011. Both measures suggest that liquidity conditions are improving.

With no shortage of funds in the banking system, but new loans low, the obvious conclusion is that it is constrained demand for loans, not a constrained supply of credit, that is the problem. The shrinking share of long-term loans in the total for new lending - down to 28 percent in April from an average of 51 percent in 2011 - suggests businesses don't see so many opportunities for profitable investment.

In the past, the demand for loans was always strong. Increasing supply by lowering the reserve-requirement ratio was a surefire way to give growth a boost. If demand is now less assured, opening the lending taps may no longer provide a quick fix.