China loan growth beats estimates

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New yuan loans increased by only CNY 645.4 billion in April after an increase of CNY 3.13 trillion in March. The market consensus was 2.2 trillion yuan. April is generally a month of lower loan growth than March, but April’s loan growth is just too weak. That’s consistent with very weak growth in overall finance, which rose just 910.2 billion yuan in April from 4.65 trillion yuan in March.

Banks can blame blockages

The main reason for this weak credit growth is due to the Covid lockdowns which have created difficulties in obtaining new loans. During the shutdowns, many individuals and businesses suffer loss of wages and loss of business, so there should be an increase in demand for loans. If the supply of loans were stable, we should have seen a jump in new loans in April.

But that was not the case as mainland Chinese banks are now more credit sensitive. During shutdowns, banks tend to be more risk averse. They were told to keep overdue loans on their books. Under these circumstances, banks have become reluctant to create new loans, as it would mean taking more risk getting new loans and then waiting for them to default if the lockdowns continue.

This is bad for the government because they would like to see the banks lend a hand to the economy. But from a risk management perspective, banks are protecting their capital ratios, which is not a bad idea for the whole Chinese financial system.

The PBoC is undecided: to cut or not to cut

The People’s Bank of China (PBoC) is struggling to decide on lowering interest rates by reducing the key rate (Medium Lending Facility) and/or the reserve requirement ratio (RRR). The messages from the government and the central bank are mixed. It is difficult to decide because lowering interest rates is not a direct way to help an economy that has been damaged by the confinements. Tax measures would be more effective, and there are quite a few of them for small and medium-sized businesses and individuals.

There may be new tools from the PBoC, as she promised, which will hopefully arrive soon.

We believe that one solution is for banks to cede some loans to asset management companies, which gives them more room to increase their loans. But asset management companies have to take on weak bank credit. Then there is the question of how much weak credit asset management companies can hold without raising too much capital. There is no simple solution to easing monetary policy when the uncertainties associated with long lockdowns remain high.
Source: ING

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