China’s Lending Problems

ChinaJuly2012banklending.bmpBy John Richardson

CHINA’s bank lending slumped by 41.3 percent in July from the previous month, the country’s central bank announced last Friday.

This was well below the median forecast of 14 economists polled by Dow Jones newswire, and added to the gloom created by the earlier release of disappointing trade, output and retail sales figures.

Medium to long term loans to enterprises also fell in July – to Yuan92bn, the lowest level so far this year, compared with Yuan163n in June. The loans are viewed as an important measure of investment appetite.

Economists said that reluctance to borrow money by companies was a big factor behind the loan-growth statistics. This is consistent with what we have been hearing in petrochemicals markets for several months now.

“Loans to small and medium firms fell in July,” a loan officer at a major state-owned bank told the Wall Street Journal (WSJ). As we discussed last week, the big banks, worried about non-performing loans (NPLs), are reluctant to lend to small and medium-sized enterprises (SMEs).

Big companies have plenty of financing, and have taken advantage of lower interest rates to pay off their debts, added the loan officer.

But until or unless the SMEs become more willing to borrow money, and the banks are more prepared to lend to them, there can be no significant recovery in chemicals and polymer demand. The reason is that the SMEs are responsible for the majority of chemicals and polymer buying in China.

One other explanation for the decline in lending is the growth of wealth management products (WMPs) that give investors an alternative to what have been abysmal rates of return on bank deposits, according to another article in the WSJ.

“WMPs are structured so that funds leave deposits at the beginning of the quarter and return at the end, in time for quarterly checks by the regulator,” wrote the newspaper.

“Since the beginning of 2011, that has resulted in a new pattern in quarterly lending. In the first month of the quarter, falling deposits crimp banks’ ability to lend. In the final month deposits rebound, and loans with them. The same pattern is evident in July, with deposits down by Yuan500.6bn.”

But the WSJ added that the main reason for disappointing lending might turn out to be the weak business climate.

And so, where do we go from here?

Beijing might make further reductions in interest rates and bank-reserve requirements. Even easier lending conditions will, however, have little effect unless banks stop worrying about NPLs and companies become more confident.

The other hope for Q4 is that infrastructure spending, much of which is being carried out by local authorities, will boost growth.

As we shall discuss tomorrow, however, the state-owned banks might be unable to fund all the 500 or so infrastructure projects being planned – again because of the NPL issue.

Local authorities are also short of cash because their revenues have declined as a result of the economic slowdown.

China’s financial system, as we shall also discuss tomorrow, is under such stress that this represents a threat to growth in 2013 and beyond.

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