China adjusts financial sector GDP calculation, triggers first financing contraction in nearly 20 years

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15th May 2024 – (Beijing) China has revamped its approach to measuring the financial sector’s contribution to GDP, a move that analysts believe spurred the first decline in total social financing in nearly two decades. This revision, effective from the first quarter of 2024, aims to improve the precision of economic data and support the real economy by discouraging the idle accumulation of capital within the financial system.

In April, aggregate social financing in China, which encompasses bank loans, bonds, and stock market funding, fell by 18.9 billion yuan ($2.6 billion) from March. This downturn marks the first of its kind since October 2005, according to a recent announcement by the People’s Bank of China (PBOC).

Concurrently, the M1 money supply, which includes cash in circulation and certain bank deposits, saw a year-on-year decrease of 1.4% in April, its first drop in over two years. This decline reflects underlying challenges beyond immediate economic indicators, indicating persistent weak domestic demand influenced by enhanced regulatory oversight aimed at curbing data manipulation in financial reporting.

The new methodology for calculating the financial sector’s added value now considers net interest incomes and bank-related fees and commissions, moving away from the previously used metrics based on the growth rates of bank deposits and loans. This change addresses concerns over the potential for local authorities to inflate economic data artificially.

This revision comes as China continues to report a relatively high proportion of financial sector contribution to GDP, estimated at around 8%, compared to the OECD average of 4.8%. Such high figures have drawn scrutiny and legislative attention, particularly as they contradict Beijing’s strategic focus on bolstering the real economy, highlighted during last year’s central financial work conference.