SHENZHEN, CHINA – NOVEMBER 16: A boy sits outside a Bank of China branch while using a smartphone on November 16, 2024 in Shenzhen, Guangdong Province, China.
Cheng Xin | Getty Images News | Getty Images
Chinese commercial banks have a big problem.
With consumers and businesses gloomy about the prospects for the world's second largest economy, loan growth has stalled. Beijing's stimulus push has so far failed to boost consumer credit demand, and has yet to spark any meaningful rebound in the weak economy.
So what do banks do with their money? Buy government bonds.
China's sovereign bonds have seen a strong rally since December, with 10-year yields falling to record lows this month, falling by about 34 basis points, according to LSEG data.
“The lack of strong consumer and business loan demand has led to capital inflows into the sovereign bond market,” said Edmund Goh, director of fixed income investment at abrdn in Singapore.
That said, “The biggest problem on the ground is the lack of assets to invest,” he said, because “there are no signs that China can get out of deflation right now.”
Total total 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 new bank loan was 580 billion yuanagainst 1.09 trillion yuan a year earlier.
Borrowing demand has failed to pick up despite massive stimulus measures that the Chinese authorities began rolling out last September, when the economy came close to missing its full-year growth target of ” about 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 from November.
“There is still a lack of quality loan demand as private enterprises remain cautious in allowing new investments and households are also tightening their purse strings,” said Lynn Song, chief economist at ING.
For this year, authorities have promised to make increasing consumption a priority and revive credit demand with lower corporate financing and domestic borrowing costs.
Investors may continue to look for “risk-free sources of yield” this year because of the high level of uncertainty amid possible tariff action from abroad, Song said. noting that “some question marks still remain about the strength of domestic policy support.”
There are no better alternatives
The drop in lending comes as mortgages, which used to fuel credit demand, remain at a low level, said Andy Maynard, managing director and head of equity at China Renaissance.
Onshore Chinese investors have to contend with a lack of “investment assets to invest in, both in the financial market and the corporate market,” he said.
China's official data showed on Thursday Annual inflation in 2024 was 0.2%indicating that prices barely grew, while wholesale prices fell, down 2.2%.
Institutions are increasingly bullish on government bonds because they believe economic fundamentals will remain weak, along with fading hopes for a strong policy push, said Zong Ke, a portfolio manager at a Shanghai-based asset manager. Wequant.
Ke said that the current policy interventions are only “attempts to prevent economic collapse and cushion against external shocks” and “only to avoid cheap.”
'Perfect Storm'
The yield on the 10-year US Treasury has been rising at its fastest pace since June and Wednesday's spike sent the yield to the top of 4.7%, near levels last seen in April.
The widening yield differentials between Chinese and US sovereign bonds could risk fueling capital outflows and put more pressure on the yuan which has been weakening against a greenback.
The onshore Chinese yuan hit a 16-month low against the dollar on Wednesday, while the offshore yuan has been on a multi-month slide since September.
“You have the perfect storm,” said Sam Radwan, founder of Enhance International, citing lower government bond yields, a prolonged real estate crisis and the effects of rising taxes as risk factors, weighing on the sentiment of foreign investors with assets. on land.
While reducing the attractiveness of Chinese bonds among foreign investors, the widening yield differentials with US Treasuries have little effect on the performance of Chinese government bonds due to the “small share of foreign assets, ” said Winson Phoon, head of fixed income research, Maybank. Investment Banking Group.
a silver lining
Falling yields offer Beijing a silver lining – lower funding costs – as policymakers are expected to ramp up new bond issuance this year, ING Song said.
Beijing unveiled a $1.4 trillion debt swap program in November, aimed at easing a local government funding crisis.
“For much of 2024, policymakers intervened when the 10-year yield hit 2%,” Song said, noting that the PBOC had “quietly stopped intervening ” in December.
Investors expect the central bank to unveil new monetary easing measures this year, such as further cuts to the key interest rate and the amount of money banks must hold as reserves. At the beginning of the year, PBOC said it would cut key interest rates at an “appropriate time.”
“The bank will enrich and improve the monetary policy mechanism, buy and sell financial bonds and take into account trends in long-term yields,” according to the statement on January 3.
However, expectations of rate cuts will only keep the bond rally going.
Economists at Standard Chartered Bank see the bond rally continuing this year but at a slower pace. The 10-year yield could fall to 1.40% at the end of 2025, they said in a note on Tuesday.
Credit growth could stabilize by the middle of the year as stimulus policies begin to lift certain sectors of the economy, the economists said, leading to a slower decline in bond yields.
China's central bank said on Friday that it has government bond purchases would be temporarily suspended due to excess demand and undersupply in the market.
