Chinese banks are overflowing with money no one wants to borrow amid lockdown

Chinese authorities face an uphill battle to persuade businesses and households to increase borrowing as the COVID-19 outbreak and lockdowns continue to crush confidence.

After loan growth weakened in April to its worst level in nearly five years, several indications are that May’s data won’t be much better. Home sales continued to decline, indicating a lack of appetite for mortgages and weak demand for credit among real estate companies. Banks are struggling to find enough customers, and have exchanged bills with each other just to be able to meet regulatory requirements for commercial lending.

The reluctance to borrow stems in large part from the uncertainty surrounding China’s Covid restrictions and whether future outbreaks could lead to frequent lockdowns like the ones that have disrupted activity in Shanghai for weeks. Companies were forced to halt production and cut jobs, revenue plummeted and profits plummeted. Several companies are suspending their expansion plans.

said Xing Zhaopeng, chief China strategist at Australia & New Zealand Banking Group Ltd. This indicates that China’s economic recovery may be weak even in the third quarter, when many investment activities can only be started after loans are secured.

The scenario is difficult for policymakers, who are pushing banks to lend more. The People’s Bank of China asked lenders last week to “make every effort” to increase lending. He also urged the banks to reduce mortgage rates and called on them to stabilize lending in the real estate sector.

The result is that the financial system is awash with liquidity, and any central bank monetary easing — such as interest rate cuts and liquidity injections — is likely to prove less effective in stimulating growth in the economy.

Here are four graphs showing that credit demand in China is likely to remain subdued in May, even as the Covid outbreak begins to wane and cities begin to reopen.

bank rates

Low interest rates on a type of short-term interbank loan is a sign that banks are not lending much to businesses.

The interest rate waiver for bankers’ acceptances due in one month fell to 0.01% early last week. It was the fourth time since December that the price approached zero at the end of the month, according to data from the Shanghai Mercantile Exchange.

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Voucher purchases are counted as business loans. A rate close to zero means that the buying banks demand almost no discount on those purchases as they try to meet regulators’ demands to lend more even if the companies are not borrowing.

“The near-zero interest rate shows that the imbalance between credit supply and demand is still exceptional,” said Wang Yifeng, chief banking analyst at Everbright Securities.

corporate debt

Nor are companies interested in selling debt. The volume of internal corporate bonds issued at maturity for the first time in seven months in May, is expected to fall by 102 billion yuan ($15.3 billion), according to data compiled by Bloomberg. This means that more debts have been paid off than borrowed.

The downturn came even as costs fell. Earlier this month, the spread between three-year AA-rated internal corporate bonds and government bonds fell to its narrowest level since 2007, according to figures compiled by Bloomberg.

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real estate downfall

The authorities have taken more concerted measures to stimulate borrowing in the real estate market. The People’s Bank of China (PBOC) lowered mortgage rates to a record high this month and banks lowered their five-year lending rate, bringing home loan rates down by as much as 35 basis points. The authorities also said that they will support affordable housing needs, and more cities are easing restrictions on home buying by lowering mortgage rates, and allowing people in other cities to buy homes or move forward. Other approaches.

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Consumers remain cautious about adding leverage. Residential property sales in 50 major cities tracked by China Real Estate Information Corp. Its total value reached 131.5 billion yuan in the first two weeks of May, down 64% from last year. The decline suggests that mortgage numbers will likely remain weak in May after declining in April, lowering home lending in the medium and long term.

“It is difficult to immediately stimulate housing demand,” CRIC analysts, including Yang Kewei, wrote in a report in May.

“Buyers are unsure whether developers can deliver projects on time, whether home prices will fall, and whether they will be able to continue paying mortgages,” the analysts wrote. “The emergence of the epidemic has reduced the population’s expectations of income stability. »

cash flow

The banking system is full of cash. The overnight repo rate – a leading indicator of interbank borrowing costs – has remained below 2% for more than two months, the longest in two years.

The central bank and banking regulator last week intensified calls for lenders to increase lending, asking major financial institutions to “take responsibility, use all resources to effectively communicate demand for credit. And promote policy transmission.”

That could have prompted those institutions – especially large state-owned banks and political lenders – to increase lending in the last week of May, said Wang of Everbright Securities.

“Let’s wait and see how the loan numbers turn out over the course of the month,” he said.

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