Chinese lenders have a big challenge: they can’t lend enough

Chinese commercial banks have a big problem.

With consumers and businesses gloomy about the outlook for the world’s second-largest economy, credit growth has stalled. Beijing’s stimulus push has so far failed to boost demand for consumer credit and has yet to spark any meaningful rebound in the faltering economy.

So what do banks do with their money? Buy government bonds.

Chinese sovereign bonds have seen a strong rally since December, with 10-year yields falling to all-time lows this month, falling by around 34 basis points, according to LSEG data.

“The lack of strong demand for consumer and business credit has led to capital flows into the sovereign bond market,” said Edmund Goh, chief investment officer for fixed income at abrdn in Singapore.

That said, “the biggest problem on earth is the lack of assets to invest,” he added, as “there are no signs that China can get out of deflation at the moment.”

Total new yuan loans in the 11 months to November 2024 fell more than 20% to 17.1 trillion yuan ($2.33 trillion) from a year earlier, according to data released by the People’s Bank of China. In November, new bank credit was 580 billion yuan, up from 1.09 trillion yuan a year earlier.

Credit demand has failed to pick up despite the sweeping stimulus measures that Chinese authorities began to unveil since last September, when the economy missed its full-year growth target of “around 5%.”

Goldman Sachs sees growth in the world’s second-largest economy slowing to 4.5% this year and expects credit demand in December to have slowed further from November.

“There is still a lack of quality borrowing demand as private enterprises remain cautious about approving new investments and households are also tightening their belts,” said Lynn Song, chief economist at ING.

For this year, the authorities have pledged to make consumption growth a top priority and revive credit demand with lower corporate financing and household borrowing costs.

Investors may continue to look for “sources of risk-free yield” this year due to the high level of uncertainty amid possible tariff action from abroad, Song said, noting “some question marks still remain as to how strong the be the support of internal politics”.

The credit slowdown comes as mortgage lending, which once fueled credit demand, is still in its tailspin, said Andy Maynard, managing director and head of equities at China Renaissance.

Onshore Chinese investors have to contend with a lack of “investable assets to put money into, both in the financial and physical markets,” he added.

Official data on Thursday showed China’s annual inflation in 2024 was 0.2%, signaling that prices barely rose, while wholesale prices continued to fall, falling 2.2%.

Institutions are increasingly bullish on government bonds on the belief that economic fundamentals will remain weak, along with fading hopes for a strong political push, said Zong Ke, portfolio manager at the asset manager. based in Shanghai, Wequant.

Ke said the current policy interventions are simply “attempts to prevent economic collapse and protect against external shocks” and “simply to avoid a free fall”.

The yield on the 10-year US Treasury has risen at its fastest pace since June, and a rise on Wednesday pushed the yield to a high of 4.7%, nearing levels last seen in april

Widening yield spreads between Chinese and US sovereign bonds could risk encouraging capital outflows and put further pressure on the yuan, which has weakened against the greenback.

The onshore Chinese yuan hit a 16-month low against the dollar on Wednesday, while the offshore yuan has been in a multi-month slide since September.

“You have the perfect storm,” said Sam Radwan, founder of Enhance International, citing lower government bond yields, the protracted real estate crisis and the impact of rising rates as risk factors weighing on sentiment. foreign investors with assets on land.

While reducing the appeal of Chinese bonds among foreign investors, widening yield spreads with U.S. Treasuries have little impact on the performance of Chinese government bonds because of the “small share of foreign funds,” Winson Phoon said. , head of fixed income research, Maybank. Investment Banking Group.

Falling yields offer Beijing a “lower funding cost” as policymakers are expected to increase new bond issuance this year, ING’s Song said.

Beijing unveiled a $1.4 trillion debt swap program in November aimed at easing the local government’s funding crisis.

“For most of 2024, policymakers acted to intervene whenever 10-year yields hit 2%,” Song said, noting that the PBOC had “quietly stopped intervention” in December.

Investors expect the central bank to unveil new monetary easing steps this year, such as further cuts in the key interest rate and the amount of cash banks must hold as reserves. At the end of the year, the PBOC said it would cut key interest rates at an “appropriate time”.

“The bank will enrich and improve the package of monetary policy instruments, buy and sell treasury bonds and pay attention to movements in long-term yields,” the January 3 statement said.

The prospect of a rate cut, however, will only keep bonds higher.

Economists at Standard Chartered Bank see bond growth continuing this year, but at a slower pace. The 10-year yield could fall to 1.40% by the end of 2025, they said in a note on Tuesday.

Credit growth may stabilize by mid-year as stimulus policies begin to lift some sectors of the economy, economists said, leading to a slower decline in bond yields.

China’s central bank said on Friday it will temporarily stop buying government bonds due to excess demand and short supply in the market.