China banks issue phantom loans to hit targets in slow economy

BEIJING - Mr Jerry Hu, who owns an auto-parts firm in eastern China, was approached in October with a strange request. A loan officer from one of the country’s biggest banks asked him to borrow five million yuan (S$914,000), deposit the money and repay it in November. The bank even agreed to cover the interest.

“Their managers kept calling me,” said Mr Hu, whose firm in Zhejiang province near Shanghai is a valued client because of its steady cash flow and solid profits. “I didn’t really need a loan, but I still agreed to help.”

Known as “quick-lend-and-recover”, the practice is spreading as banks come under unprecedented pressure to hit government-set targets that cannot be met by real demand, according to interviews with almost two dozen bankers.

The loans underscore a major challenge facing policymakers as China’s economy slows: They can make funds cheaper and more abundant, but they cannot force people to borrow, spend or invest.

While targets vary from bank to bank, they have been told to lend at least as much as in 2024, said the bankers. They are worried that the number of borrowers could shrink even more over the final few months of 2025, at a time when record low margins and rising bad loans are already putting lenders under strain.

Retail clients are getting similar requests.

Jane, who works for a bank in Zhejiang and requested to be identified only by her first name, was asked by several rival banks to take out a consumer loan and hold the funds for only a few days before repaying. Banks in these cases have also offered to cover the interest, with some loan officers even using their own money to pay for clients such as Jane, so that they can tap them again.

The National Financial Regulatory Administration (NFRA) did not immediately respond to a request for comment. 

Cooking up loan data has drawn scrutiny before, and the authorities have vowed to prevent funds from circulating within the banking system instead of flowing to the real economy. 

In a government audit report, six state-owned financial institutions were found in 2023 to have issued 516.7 billion yuan in loans just before key assessment periods, only to withdraw them shortly after. Some firms deposited funds with the banks prior to borrowing equivalent amounts, or subsequently parked the loan proceeds back into time deposits with the same banks.

In one recent example, a Bank of Qingdao branch was fined 518,300 yuan for inflating deposits and loans via the quick-lend-and-recover practice, according to an October notice from the NFRA.

While the authorities were able to engineer a rapid credit expansion through infrastructure spending and real estate development in the past, that is getting increasingly difficult as China’s property market is in a prolonged downturn and households and companies are opting to pay down debt.

An entrepreneur in Guangdong province – who asked not to be identified – said that when he recently tried to repay around three million yuan in loans ahead of schedule, bank staff asked him to delay the repayment by a month to not impact quarterly targets. When he returned the following month, the bank offered cash compensation equivalent to the savings he would have gained from early repayment, provided that he kept the loan outstanding.

Regulators have also been pressing lenders to step up credit support for the economy after new renminbi lending contracted in July for the first time in two decades. The outstanding amount of loans – excluding those to financial institutions – expanded 6.4 per cent in September from a year ago, the worst reading since data began in 2003.

The structural imbalance between abundant supply and low demand is intensifying competition across the banking system.

Despite calls from regulators to avoid excessive competition and price wars, many lenders have continued to slash consumer loan rates in 2025. Major banks are offering better lending terms or additional incentives – such as more favourable foreign-exchange deals – to lure clients from rival lenders, according to bankers.

Meanwhile, local government financing vehicles, a previous key source of credit demand, have also dried up due to Beijing’s ongoing crackdown on hidden debt in the sector. The number of financing vehicles and their total debt have dropped by 71 per cent and 62 per cent, respectively, over the past 2½ years, according to the central bank.

In another sign of deteriorating domestic demand, overall investments have so far in 2025 contracted for the first time since 2020. While the country’s economic growth is on track to reach 2025’s target of about 5 per cent, many analysts predict that the final three months of 2025 will see the slowest performance since the Covid-19 pandemic lockdowns in 2022.

Bank executives are pondering two outcomes, and both are bad. They can either take on more risk, or fall short of the targets. BLOOMBERG