Chinese banks cut back on traditional lending as concerns about the economy rise

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Chinese banks rushed last month to meet their annual state-imposed loan quotas by purchasing low-risk financial instruments rather than issuing loans, an increase that bankers and analysts say reflects the mistrust of financial institutions in the face of the country’s economic slowdown.

Rising demand for bankers’ acceptances, guaranteed by their issuers and technically classified as loans, reduced interest paid by banks to nearly zero percent in the second half of December. A record low of 0.007% was hit on December 23.

This was well below the average cost of capital of 2.5% of Chinese banks over the same period, implying that they would rather lose money on low-yielding bankers’ acceptances rather than risk losses. larger by issuing their own loans at higher interest rates.

President Xi Jinping’s administration wants banks to lend more, especially to small and medium-sized businesses in government-favored sectors such as agriculture and new energy vehicles. Banks are reluctant to do so, however, as they believe the slowing Chinese economy has reduced the pool of qualified borrowers.

Loan officers said buying bankers’ acceptances to meet their year-end loan quotas was the surest way to support government policy goals.

“Supporting the economy at large is a political task to which we cannot say ‘no’,” said an official from Zhongyuan Bank in central Zhengzhou City, who requested anonymity. “Our losses from purchasing bank insurance are lower than from loans to unskilled businesses.”

Businesses use bankers’ acceptances as a form of payment, which the cardholder can redeem from the issuing bank. They can also be bought and sold in open markets, such as the Shanghai Commercial Paper Exchange.

Loan officers told the Financial Times that Xi’s regulatory crackdown had hit many of their top borrowers in industries such as real estate and private education, with no sign that conditions would improve anytime soon.

“The authorities want us to support the real economy while keeping bad debts under control,” said a loan officer at Zheshang Bank in Hangzhou, who asked not to be identified. “It’s difficult to achieve in today’s business environment. “

Bo Zhuang, Singapore-based analyst at Loomis Sayles, an asset manager, added: “This is a conundrum that the current policy mix cannot solve.

China’s total social financing, the broadest measure of credit supply, recorded three consecutive double-digit year-on-year declines from July to September, reflecting government efforts to deflate the housing bubble by tightening lending mortgage.

The credit crunch has pushed China Evergrande Group and other over-indebted developers into default, delaying the completion of apartments financed by prepayments from homebuyers.

Central and local government officials began to fear that protests from aggrieved homebuyers, as well as retail investors who bought investment products issued by developers and unpaid construction workers, could threaten the market. social stability.

This led to a moderate change in monetary policy as China’s central bank unveiled a series of measures last month, including cuts to the benchmark lending rate and reserve requirements to inject liquidity into the real economy after several months of tightening.

Communist Party officials have vowed not to stray from their broader political goals, which include a more affordable housing market and tighter restrictions on “disorderly capital expansion” – a political code for more regulation. strict regulations from some of the country’s largest private sector companies.

But at their year-end political meeting in December, they also stressed the importance of stabilizing the economy in the run-up to this year’s 20th party convention, in which Xi is expected to secure an unprecedented third term. at the head of the party, the army and the government.

Additional reporting by Tom Mitchell in Singapore

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