Slowing loan growth weighs on cautious Chinese banks

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By Iris Pang

Sluggish loan growth comes from the real estate sector

New bank lending to China fell more than expected in December, with overall funding falling from CNY 2.61 trillion in November to CNY 2.37 trillion in December, and new yuan loans falling from CNY 1.27 trillion in November. to CNY 1.13 trillion last month. . While end-of-year credit tends to grow more slowly, the numbers are surprising given that the People’s Bank of China, the central bank of China, has reduced the reserve requirement ratio (RRR) by 0.5 points. percentage point last month and interest rates 5 basis points.

For the corporate sector, loan demand is primarily affected by real estate and businesses along the supply chain.

M2 fell to 9% year-on-year from 8.5% year-on-year in December, which is as expected as companies prepare liquidity for bonuses and refunds ahead of the Chinese New Year.

Easing monetary policy may not work if banks are concerned about credit quality

The weak credit growth this month shows that despite the RRR and interest rate cuts, banks are reluctant to lend because they are more concerned with credit quality. This is because several large companies have recently defaulted. Although the default entities are mostly real estate developers, the risk increases for suppliers, mainly in the building materials industry.

In fact, this is exactly the result of debt reform, which is debt reduction. But if lending continues to decline on a monthly basis, the central government may need to send a clearer message to the banks. If awareness of risk is at the top of banks’ list of concerns, then further cuts in the RRR and interest rates may not result in more credit. This means that even an easing of monetary policy may not stimulate economic activity.

We could also see a return to the old days when banks lent to public enterprises (SEs), which are supposed to be better in terms of repayment capacity.

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