SHENZHEN, CHINA – NOVEMBER 16: A boy uses a smartphone while sitting outside a Bank of China branch in Shenzhen, Guangdong Province, China on November 16, 2024.
Cheng Xin | Getty Images News | Getty Images
China’s commercial banks face huge problems.
Loan growth has stalled as consumers and businesses grow pessimistic about the outlook for the world’s second-largest economy. Beijing’s stimulus measures have so far failed to stimulate demand for consumer credit or trigger any meaningful rebound in the faltering economy.
So what do banks do with cash? Buy government bonds.
London Stock Exchange data shows that China’s sovereign bonds have rebounded strongly since December, with the 10-year bond yield falling to a record low this month, down about 34 basis points.
“The lack of strong demand for consumer and business loans has led to capital inflows into the sovereign bond market,” said Edmund Goh, director of fixed income investments at abrdn in Singapore.
Still, “the biggest problem domestically is the lack of investable assets,” he added, because “there are currently no signs that China can escape deflation.”
In the 11 months to November 2024, total new RMB loans fell more than 20% from the same period last year to 17.1 trillion yuan ($2.33 trillion), According to data released by the People’s Bank of China. November, New bank loans increased by 580 billion yuancompared with 1.09 trillion yuan in the same period last year.
Loan demand has yet to pick up despite Chinese authorities launching sweeping stimulus measures since September last year, when the economy was close to achieving its full-year growth target of “around 5%”.
Goldman Sachs expects growth in the world’s second-largest economy to slow to 4.5% this year and expects credit demand to slow further in December than in November.
“Demand for high-quality borrowing remains insufficient as private companies remain cautious about approving new investments and households are tightening their wallets,” said ING chief economist Lynn Song.
This year, authorities have vowed to make boosting consumption a top priority and revive demand for credit by lowering corporate financing and household borrowing costs.
Song said investors will likely continue to look for “risk-free sources of returns” this year due to high uncertainty about potential tariff actions overseas, noting that “there are still some questions about the strength of domestic policy support.”
no better choice
Andy Maynard, managing director and head of equities at China Renaissance, said the slowdown in lending comes at a time when mortgage lending, used to fuel demand for credit, is still bottoming out.
He added that onshore Chinese investors must contend with a “lack of investable assets in both financial and physical markets to invest funds into.”
Official data on Thursday showed China Annual inflation rate in 2024 is 0.2%showed little growth in prices, while wholesale prices continued to fall, down 2.2%.
Zong Ke, micro-quantitative portfolio manager at Shanghai Asset Management Co., said institutions are becoming increasingly optimistic about government bonds due to the belief that economic fundamentals will remain weak and hopes for strong policy push are gradually fading.
Ko said the current policy intervention is just “an effort to prevent economic collapse and cushion external shocks” and “just to avoid a free fall.”
“Perfect Storm”
U.S. 10-year Treasury yields have been rising at a faster pace since June, surging to a high of 4.7% on Wednesday. Close to April levels.
The widening yield differential between Chinese and U.S. sovereign bonds could pose the risk of encouraging capital outflows and put further pressure on the dollar, which has been depreciating.
China’s onshore yuan hit a 16-month low against the dollar on Wednesday, while the offshore yuan has been sliding for months since September.
“It’s a perfect storm,” said Enhance International founder Sam Radwan, who cited lower government bond yields, the prolonged housing crisis and the impact of rising tariffs as risk factors. This has dampened foreign investors’ confidence in onshore assets.
Winson Phoon, head of fixed income research at Maybank, said that although it reduced the attractiveness of Chinese bonds to foreign investors, the widening gap in yields with U.S. Treasury bonds had little impact on the performance of Chinese government bonds due to the “small share of foreign funds.” big.
glimmer of hope
ING’s Song said lower yields offer Beijing a glimmer of hope – lower financing costs – as policymakers expect to ramp up new bond issuance this year.
Beijing announced a $1.4 trillion debt swap plan in November aimed at easing the local government financing crisis.
“For most of 2024, as long as the 10-year Treasury yield reaches 2%, policymakers will take action to intervene,” Song said, noting that China’s central bank had “quietly stopped intervening” in December. .
Investors expect the central bank to introduce new monetary easing measures this year, such as further cuts to key interest rates and the cash reserves banks must hold. At the end of the year and the beginning of the year, Central Bank says it will cut key interest rates At the “appropriate time”.
“The central bank will enrich and improve its monetary policy toolbox, conduct government bond sales, and pay attention to long-term yield trends.” Statement of January 3.
However, the prospect of rate cuts will only keep the bond rally going.
Economists at Standard Chartered expect the bond rally to continue this year but at a slower pace. The 10-year Treasury yield could fall to 1.40% by the end of 2025, they said in a note on Tuesday.
Economists say credit growth is likely to stabilize by mid-year as stimulus begins to boost some sectors of the economy, causing the decline in bond yields to slow.
China’s central bank said on Friday Will temporarily stop buying government bonds Due to excess market demand and shortage of supply.
About The Author
