Chinese lenders face a huge challenge: they cannot provide enough loans

Chinese commercial banks face a huge problem.

With consumers and businesses pessimistic about the prospects for the world's second-largest economy, loan growth has stalled. Beijing's stimulus campaign has so far been unable to stimulate demand for consumer credit, and has yet to lead to any meaningful recovery in the faltering economy.

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

Chinese sovereign bonds have seen a strong rise since December, with 10-year bond yields falling to all-time lows this month, falling by about 34 basis points, according to London Stock Exchange data.

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

However, “the biggest problem internally is the lack of assets for investment, as there are no signs that China can emerge from the downturn 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 ago. According to data released by the People's Bank of China. In november, The volume of new bank loans reached 580 billion yuanCompared to 1.09 trillion yuan a year ago.

Demand for loans has failed to rise despite the sweeping stimulus measures that Chinese authorities began unveiling since last September, when the economy was on the verge of missing its full-year growth target of “about 5%.”

Goldman Sachs expects growth in the world's second-largest economy to slow to 4.5% this year, and demand for credit is expected to slow more in December than in November.

“There remains a lack of demand for high-quality borrowing, as private companies remain cautious in approving new investments and households tighten portfolio constraints,” said Lin Song, chief economist at ING.

This year, the authorities pledged to make boosting consumption a top priority and revive demand for credit by reducing corporate financing and household borrowing costs.

Song said investors may continue to look for “sources of risk-free return” this year due to the high level of uncertainty amid potential tariff actions from abroad, noting that “some question marks remain about the strength of domestic policy support.”

Official data showed on Thursday in China Annual inflation in 2024 reached 0.2%This indicates that prices barely grew, while wholesale prices continued to decline by 2.2%.

Institutions are increasingly bullish on government bonds due to a belief that economic fundamentals will remain weak, coupled with fading hopes for a strong policy push, said Zong Ke, portfolio manager at Shanghai-based Wequant Asset Management.

Key said current policy interventions are merely “efforts to prevent economic collapse and mitigate external shocks” and “simply to avoid free fall.”

The yield on the 10-year US Treasury note has risen at the fastest pace since June and a rise on Wednesday pushed the yield to 4.7%. It is approaching levels last seen in April.

Widening yield spreads between Chinese and US sovereign bonds may risk encouraging capital outflows and putting more pressure on the yuan, which has been weakening against the dollar.

The Chinese yuan at home recorded its lowest level in 16 months against the dollar on Wednesday, while the yuan abroad has fallen for several months since September.

“You have a perfect storm,” said Sam Radwan, founder of Enhance International, describing falling government bond yields, a protracted real estate crisis, and the effects of rising tariffs as risk factors, affecting foreign investor sentiment regarding onshore assets.

With Chinese bonds less attractive among foreign investors, the widening of yield spreads with US Treasuries has little impact on the performance of Chinese government bonds due to the “small share of foreign funds,” said Winson Vaughn, head of fixed income research at Maybank. Investment Banking Group.

Investors expect the central bank to unveil new steps to ease monetary policy this year, such as additional cuts in the key interest rate and the amount of cash banks must hold in reserves. At the beginning of the year, The People's Bank of China said it would cut key interest rates At the right time.

He added: “The bank will work to enrich and improve the set of monetary policy tools, conduct purchases and sales of treasury bonds, and pay attention to movements in long-term yields.” Statement on January 3.

However, the prospect of lower interest rates will only cause bonds to continue rising.

Economists at Standard Chartered Bank believe that the rise in bonds will continue this year, but at a slower pace. The 10-year bond yield could fall to 1.40% at the end of 2025, they said in a note on Tuesday.

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

China's central bank said on Friday He will temporarily stop buying government bonds Due to increased demand and lack of supply in the market.