The Key to Enhancing Marginal Asset Profitability

On December 10, a professor from Renmin University of China, Wang Guogang, highlighted a compelling dynamic in the intersection of enterprise, investment, and market interest ratesHe emphasized that real enterprises are the heartbeat of wealth and value creationTheir marginal asset profit margins directly determine investment scales and the prevailing levels of market interest rates.

When these enterprises enjoy a high marginal asset profit margin, it indicates their capability to amplify investment and expand operationsThis scenario naturally leads to a heightened demand for credit and other financial resources, which subsequently nudges market interest rates upwardConversely, a declining marginal asset profit margin may compel companies to retract their investment ambitions, thereby diminishing their demand for creditThe resultant effect is often a reduction in market interest rates

The current climate, with negative marginal asset profit margins, reveals an evident hesitation among enterprises to boost investments for scaling production and operationsConsequently, reigniting investment enthusiasm within enterprises hinges critically on enhancing these margins—meaning an improvement in investment efficiency is essential.

Wang further analyzed economic data from recent years, noting that, since 2022, China has experienced substantial economic headwindsIn response, the People's Bank of China has enacted several rounds of interest rate cuts and reserve requirement ratio reductions to infuse the financial system with liquidity, encouraging both consumer and investment demandData illustrates that household deposits surged from 103.31 trillion yuan at the end of 2021 to approximately 149.20 trillion yuan by the end of October 2024, marking a growth of 44.43%. This suggests that urban and rural residents have more disposable income available for potential consumption.

However, contrary to expectations, a significant fraction of this increased capital has been channeled into bank term deposits rather than consumption

• Developing Multi-Tiered Capital Markets
• U.S. Inflation Decline Set to Slow
• Dollar Wealth Management Assets Double Amidst Interest Rate Uncertainty
• RMB Stays Steady Against a Strong Dollar
• India's Q3 GDP Growth Hits Low, Economy Faces Headwinds

As of late 2021, the proportion of term deposits within total household savings stood at 66.35%, but by October 2024, it escalated to 72.35%.

A similar trend has unfolded in non-financial enterprisesAt the conclusion of 2021, term deposits represented 62.51% of new deposits among non-financial firmsBy late October 2024, this figure climbed to 73.62%. Over the first ten months of 2024, although total deposits among non-financial enterprises shrank by 3.99 trillion yuan, term deposits witnessed a surge of 1.94 trillion yuan, indicating a prevailing trend of conservative financial management.

This data clearly signals that even amid abundant market liquidity, consumer and corporate willingness to spend remains subduedAn overwhelming amount of funds is finding its way into term deposits, a reflection of a cautious approach towards future economic trajectoriesThe significant uptick in term deposits among real enterprises is closely linked to a persistent decline in their marginal asset profit margins

Specifically, large-scale industrial enterprises saw their marginal asset profit margins dip to -6.49% and -10.19% in 2022 and 2023, respectivelyNon-financial listed companies also exhibited a downward trajectory, reporting marginal asset profit margins of 1.95% and -0.76% in the same years.

A critical point to acknowledge is that the total assets and profits of listed companies are inclusive of those from newly listed firms, which typically present higher profit ratiosAdjusting for newly listed companies, the existing listed companies largely report negative marginal asset profit marginsAs 2024 commenced, this troubling trend did not demonstrate any signs of meaningful recovery.

With marginal asset profit margins in the negative territory, there is a palpable lack of enthusiasm among enterprises to invest in scaling their operationsIn light of this, opting to keep idle funds in term deposits at commercial banks emerges as the rational choice for such entities; it guarantees capital safety while offering returns that outperform other investment avenues

Consequently, the downward trend in the marginal asset profit margins of enterprises inadvertently dampens the yields offered by financial products such as stocks, funds, and other investmentsThus, residents opting to withdraw funds from more volatile financial instruments in favor of safer term deposits aligns with prudent financial strategies.

Confronted with these challenges, Wang underscored the necessity for enhancing the influence of interest rate adjustments on the supply of tradeable fundsHe pointed out that elevating the marginal asset profit margin of real enterprises is paramountA Hefty meeting on December 9 has already asserted the importance of improving investment efficiency, alongside prioritizing technological innovation to lead the development of new productive capacities and building a modern industrial system.

Enhancing quality and efficiency is not only a critical component of high-quality economic development but is also an inherent logical outcome of it

China has transitioned beyond the era of latent advantages; critical core technologies and world-class high-tech products are not easily obtainable or purchasableThe challenges currently facing the Chinese economy are essentially manifestations of the growing pains of transitioning from an emerging economy.

To navigate these obstacles effectively, it is essential to expedite the development of new productive capacities and to elevate the technological sophistication embedded within products and wealth generationIn fostering this transformation, financial institutions like commercial banks must align interest rate policy adjustments with the goal of increasing the marginal asset profit margins of real enterprisesThis strategic focus not only spurs the healthy growth of real enterprises but also cultivates long-term stability and growth potential for banks and financial institutions engaged in lending and investment activities.