China banks inflating their loan numbers as demand sinks

Chinese banks lowered some of their benchmark loan prime rates for the first time in months to lure in reluctant borrowers. PHOTO: EPA-EFE

BEIJING (BLOOMBERG) - 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-19 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 one another through short-term financing arrangements that can be dressed up as new loans to boost volumes, the executives said.

It was not immediately clear how widespread the practice has become. The China Banking and Insurance Regulatory Commission and the People's Bank of China (PBOC) did not 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 that the economy will grow just 3 per cent and youth unemployment has surged to a record 20 per cent.

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 that banks are facing. The firm, which serves major power companies including Schneider Electric, has received loan offers from a dozen banks at record low rates but has no plans to borrow given the cloudy outlook.

"We are not considering borrowing because our cash can fully cover our operations and modest growth," said the firm's chief executive officer. "The Covid-19 outbreaks and property downturn have had an impact on us."

As data for credit growth and retail sales has shown that the economy is slowing sharply, policymakers have unveiled a series of steps to support growth and borrowing. The PBOC unexpectedly cut its key policy rate this month, while the authorities are also planning 200 billion yuan (S$40.8 billion) in special loans to developers and a broader relending programme.

Chinese banks on Monday (Aug 22) 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 that banks are sitting on plenty of cash. Household deposits increased almost 13 per cent in the first half of the year, the largest jump on record.

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 is 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 US$350 billion (S$489 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 per cent of total loans. There was 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.

The majority of China's small bricks-and-mortar shops cannot get a bank loan because they do not 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 able to get only 60 per cent of the bank loan it applied for. This is 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.

The policy rate cut "does not materially change the momentum for weak credit growth", Ms Liu Peiqian, chief China economist at NatWest Group, said in a note.

"Slowing property sector growth and Covid-19 policies are still the main drag to credit demand, as corporate and household sentiment both remain very fragile."

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