Chinese banks are employing unusual practices to inflate their loan volumes as they struggle to meet government demands to pump more credit into an economy beset by Covid lockdowns and a beleaguered property market.
With borrowers reluctant to take on debt as economic growth slows, some state-owned banks are extending loans to companies and then allowing them to deposit funds at the same interest rate, according to executives at six banks who spoke to Bloomberg News on condition of anonymity. Others are borrowing from each other through short-term financing arrangements that can be dressed up as new loans to boost volumes, the executives said.
It wasn’t immediately clear how widespread the practice has become. The China Banking and Insurance Regulatory Commission and the People’s Bank of China didn’t immediately respond to requests for comment.
The moves underscore the reticence among businesses and households to borrow in an uncertain environment, where some forecasters are predicting the economy will grow just 3% and youth unemployment has surged to a record 20%. Cuts to the key policy rate and admonitions to step up lending to developers, local governments and small businesses have so far failed to arrest plummeting loan growth. Credit posted the smallest increase in at least five years last month, with consumer demand at its lowest ebb since 2007.
A successful electronics supplier in Zhejiang, in eastern China, is a good illustration of the problems banks are facing. The firm, which supplies major power companies including Schneider Electric SE, has received loan offers from a dozen banks at record low rates but has no plans or needs to borrow given the cloudy outlook.
“We’re not considering borrowing because our cash can fully cover our operations and modest growth,” said the firm’s chief executive officer, who asked only that his first name, Albert, be used because of the sensitive situation. “The Covid outbreaks and property downturn have had an impact on us.”
The PBOC on Monday said that in addition to supporting the real economy, banks should enhance credit support for small- and micro-enterprises, green development, scientific and technological innovation and other fields, according to the statement.
“We must consolidate the foundation of economic recovery and development with a sense of urgency that no time can wait,” it said.
As data such as credit growth and retail sales have shown the economy is slowing sharply, policy makers have unveiled a series of steps to support growth and borrowing. The PBOC unexpectedly cut its key policy rate this month while authorities are also planning 200 billion yuan (29.3 billion euros) in special loans to developers and a broader relending program.
Chinese banks this week lowered some of their benchmark loan prime rates for the first time in months to lure in reluctant borrowers. Economists are now warning that the nation faces a “liquidity trap” with demand for loans falling while broad measures of money supply show banks are sitting on plenty of cash. Households deposits increased almost 13% in the first half of the year, the largest jump on record.
“The banking industry is suffering enormous pressure from the economic slowdown and the sector’s profit growth is likely to weaken,” said Liao Zhiming, chief bank analyst at China Merchant Securities Co. Banks are also dealing with a bigger risk-management challenge from more non-performing loans, he said.
Under pressure to lend, banks are also facing a property crisis with developers teetering on the edge and consumers unleashing an unprecedented mortgage boycott as construction has ground to halt across the nation. It’s a balancing act for banks trying to heed Beijing’s expectations for them to play an active role in protecting economic growth while curbing bad loans.
S&P Global Ratings has estimated that lenders could face mortgage losses of $350 billion in a worst-case scenario. In June, lending to the real estate sector dropped for the first time in a decade. Bad loans also increased by almost 107 billion yuan in the first half of the year to 2.95 trillion yuan.
Banks are the most exposed to the property sector and mortgages at some banks account for more than 30% of total loans. There were 39 trillion yuan of outstanding mortgages and 12 trillion yuan of loans to developers at the end of June, according to PBOC data. So far, listed banks have reported 2.1 billion yuan in delinquent mortgages as directly affected by the boycotts.
Exposure to the property sector is making banks reluctant to take on riskier lending to small businesses, who are grappling with elevated rates. Business conditions of private small companies in China contracted for the third straight month in July, according to a survey by the Cheung Kong Graduate School of Business.
The majority of China’s small brick-and-mortar shops can’t get a bank loan because they don’t have collateral or valid credit records, making expensive online credit firms their only option.
A small electric vehicle component maker in Anhui province in eastern China said the company was only able to get 60% of the bank loan it applied for. That’s because it takes a long time for its downstream clients to make payments, affecting its debt repayment ability in the eyes of banks, said the firm’s manager, who only gave only their name as Hui.
The policy rate cut “doesn’t materially change the momentum for weak credit growth,” Liu Peiqian, chief China economist at NatWest Group Plc, said in a note. “Slowing property sector growth and Covid policies is still the main drag to credit demand, as corporate and household sentiment both remain very fragile.”
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