In the recent economic landscape, a curious paradox has emergedDespite a noticeable bottoming out of inventory cycles, stock markets are sluggish, consumer spending shows little sign of recovery, and the overall economy still appears far from a full reboundThis raises a pivotal question: why is this happening?

Over the past year, we have witnessed a consistent decline in interest rates by major banks, alongside government initiatives introducing special bondsIn the first half of this year, M2 money supply growth maintained over 12%, indicating a sufficiently accommodative financial environmentYet, the tangible impacts across various sectors have been disappointingly minimalWith such an abundance of money, one would expect inflation, or at least, a rise in prices...

However, this has not been the case

Contrarily, the latest data from July shows the consumer price index (CPI) reflecting a negative 0.3% change.

Nobel laureate Milton Friedman famously stated, "Inflation is always and everywhere a monetary phenomenon." This suggests that when the quantity of goods remains the same while the money supply increases, the prices of those goods are expected to rise...

However, the current scenario presents a different storyThe supply of goods has remained relatively unchanged, while the money supply has indeed grown—yet inflation seems to be absent, yielding a counterintuitive situation...

The answer lies in a simple explanation: capital idling!

The central bank transmits funds to commercial banks, while local governments channel this money towards state-owned enterprises and large private companies

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However, a significant portion of these funds stagnate in the initial phases and fail to circulate adequately throughout the economyHence, we observe banks eagerly willing to lend at lower interest rates, yet potential borrowers exhibit reluctance to take loans, with many opting instead to pay off existing debts...

Currently, the issue is not a shortage of funds; conversely, liquidity remains abundantHowever, these funds are not reaching the hands of consumers actively participating in spending, hampering circulationEven with numerous special bonds and relatively lenient lending rates, the money fails to engage effectively in the economic multiplication process, leading to lesser circulation and thus, a negative CPI...

To comprehend this, we must first define capital idling.

Capital idling possesses two interpretations

The first denotes financial capital being detached from the real economy, circulating solely within the financial systemAt this point, funds merely function as monetary capital and have not transitioned into real productive or commodity capital.

The second interpretation refers to the slow transformation of monetary capital into productive or commodity capitalIn this scenario, while funds eventually find their way into the real economy, the duration and the number of steps involved in this conversion are prolonged.

Under normal macroeconomic conditions, a certain degree of capital idling is not unusualFor banks, in scenarios where traditional lending yields diminish, seeking more profitable and stable sources of income becomes vitalAt this juncture, engaging in interbank business to enhance the asset side can be deemed reasonable.

However, when capital idling escalates to significant scales and persists over extended periods, its implications on the economy can become pronounced.

Despite regulations imposing restrictions on various banking indices, banks need to remain profit-driven

When demands for real economy financing surge and monetary policies remain accommodating, banks are likely to circumvent regulations to disburse loans through alternative channels.

For instance, years ago, regulations restricted certain funds from being allocated to real estate or stock markets, mandating loans only for the real economyHowever, established enterprises often do not lack funds, while smaller firms present greater credit risksTo manage these risks and seek higher yields, banks gravitate towards off-balance sheet financing, using methods such as trusts to allocate funds to enterprises deemed reliable, including real estate companies and local financing platforms.

Banks also worry about the potential to recover lent amounts, opting instead for lower-yield options to avoid high risks

This creates a liquidity shortage for informal economic entities, exacerbating the divide between those with excessive resources and those with insufficient funds.

Capital serves as a profit-driven forceFunds remaining in the financial system indicate the absence of suitable investment opportunitiesConsequently, during periods of rising real estate valuations, banks are more than willing to allocate funds to real estate companiesVarious channel operations lead to an excessive concentration of capital in real estate.

Once the real estate sector no longer requires funds, shadow banking plays a role in directing some of this capital into other sectorsFinancial institutions transform this capital through intricate layers, significantly inflating actual financing costs for the private sector.

This succinctly encapsulates why, despite years of advocacy for supporting the real economy, the nation has encountered difficulties in achieving this goal!

Logically, the government's intention is for financial institutions to funnel funds directly into the real economy, reinstating economic dynamism from grassroots levels

Thus, they identify financial institutions responsible for capital idling as culprits.

Efforts to combat illegal financial practices rely heavily on strict regulationsHowever, markets inherently have their flows; every crackdown tends to force funds further into uncertaintyConsequently, banks may hold considerable amounts of capital they wish to lend out, but uncertainty in the economy leads enterprises to adopt cautious strategies, opting to maintain their liquidity instead of entering into loansMoreover, businesses may engage in layoffs and cuts to reduce their expenses.

This, in turn, aggravates the conditions of capital idling and elevates downward pressure on the economyIn the first half of 2018, we executed an aggressive deleveraging round; however, the rigid approach manifested significant economic stress in that period.

From that point forward, even though new regulations were established for financial management, their implementation faced extensive delays.

A decisive conclusion we can draw is that effective policy must align with economic cycles

The coexistence of capital idling and economic pressure frequently materializes; during economic tensions, overcoming capital idling proves challenging, as revitalizing funds within the real economy chiefly hinges on restoring confidence in that economy.

Thus, we arrive at a clearer understanding of the current situationChina's monetary policy remains accommodating, indicating sufficient liquidity within financial institutions, yet various cycles—including real estate, inventory, and production—remain at their nadirThis further constrains consumer confidence and investment willingness, amplifying economic pressures.

This situation ultimately results in the funds released by central banks and fiscal bodies failing to circulate fully within economic activities, hence why, despite the accommodating monetary stance, CPI stands at -0.3%!

But does the cyclical bottoming out signify an imminent upward shift? Not necessarily...

To draw from historical precedent, merely hitting a trough doesn't equate to immediate sustainable improvement...

For example, envision a stagnant windmill; to set it in motion, a substantial wind is necessary