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SHENZHEN, CHINA – NOVEMBER 16: A boy sits outside a Bank of China branch and uses a smartphone on November 16, 2024. in Shenzhen, Guangdong Province, China.
Cheng Xin | Getty Images News | Getty Images
Chinese commercial banks have a huge problem.
Credit growth has stalled as consumers and businesses remain gloomy about the outlook for the world’s second-largest economy. Beijing’s stimulus has so far failed to stimulate demand for consumer credit and has yet to spark a meaningful recovery in the faltering economy.
So what do banks do with their cash? Buy government bonds.
Chinese sovereign bonds have been rising strongly since December, with the yield on the 10-year bond falling to an all-time low this month, down about 34 basis points, according to LSEG.
“The lack of strong demand for consumer and business loans has led to an influx of capital into the sovereign bond market,” said Edmund Goh, director of fixed income investment at abrdn in Singapore.
However, “the biggest problem onshore is the lack of investable assets,” he added, as “at this point there is no sign that China can emerge from deflation.”
Total new renminbi loans in the 11 months to November 2024 fell more than 20% to 17.1 trillion yuan ($2.33 trillion) from a year earlier, This is evidenced by data published by the People’s Bank of China. In November new bank loans totaled 580 billion yuanagainst 1.09 trillion yuan a year earlier.
Demand for loans has not picked up despite the broad stimulus measures Chinese authorities began announcing last September, when the economy was on the brink of hitting its full-year growth target of “around 5%”.
Goldman Sachs sees growth in the world’s second-largest economy slowing to 4.5% this year and expects credit demand to slow further in December compared with November.
“There is still a lack of demand for quality loans as private businesses remain cautious about new investment and households are also borrowing money,” said Lin Song, chief economist at ING.
This year, the authorities have promised to make boosting consumption a top priority and revive credit demand by reducing corporate financing and household borrowing costs.
Investors may continue to look for “sources of risk-free returns” this year amid high levels of uncertainty amid possible tariff action from abroad, Song said, noting that “there are still some question marks over how strong domestic policy support will be.” “.
There are no better alternatives
The slowdown in lending comes as mortgages, which previously fueled credit demand, are still bottoming out, said Andy Maynard, managing director and head of equities at China Renaissance.
China’s onshore investors have to contend with a lack of “investable assets to put money into, both in the financial and physical markets,” he added.
Official data on Thursday showed China annual inflation in 2024 was 0.2%signaling that prices barely rose, while wholesale prices continued to fall, down 2.2%.
Institutions are increasingly bullish on government bonds on the belief that economic fundamentals will remain weak, coupled with fading hopes for strong policy, said Zong Ke, portfolio manager at Shanghai-based asset manager Wequant.
Ke said the current policy interventions are simply “efforts to prevent economic collapse and mitigate external shocks” and “simply avoid a free fall.”
“The Perfect Storm”
U.S. 10-year Treasury yields are rising at their fastest pace since June, with Wednesday’s jump to 4.7% approaching the level last observed in April.
A widening gap between Chinese and US sovereign bond yields risks fueling capital outflows and putting additional pressure on the yuan, which is weakening against the dollar.
China’s 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 a perfect storm,” said Sam Radwan, founder of Enhance International, citing declining government bond yields, a lingering real estate crisis and the effects of rising tariffs as risk factors weighing on sentiment among foreign investors with onshore assets.
While reducing the appeal of Chinese bonds to foreign investors, the widening spread between U.S. Treasury yields has little impact on Chinese government bond performance due to the “small share of foreign funds,” said Winson Fung, Maybank’s head of fixed-income bond research. Investment banking group.
A silver lining
Falling yields offer Beijing a good underpinning — lower funding costs — as policymakers are expected to increase new bond issuance this year, ING’s Song said.
In November, Beijing unveiled a $1.4 trillion debt swap program aimed at easing a local government financing crisis.
“For most of 2024, policymakers intervened whenever the 10-year yield reached 2%,” Song said, noting that the PBOC “quietly ended intervention” in December.
Investors expect the central bank to unveil new steps to ease monetary policy this year, such as further cuts in the key interest rate and the amount of cash banks must hold as reserves. At the end of the year, The NBK said it would cut key interest rates at the “appropriate time”.
“The bank will enrich and improve the instruments of monetary policy, buy and sell treasury bonds and pay attention to changes in long-term profitability,” the report says. statement on January 3.
However, the prospect of lower rates will only support bond growth.
Economists at Standard Chartered Bank expect bond growth to continue this year, but at a slower pace. The yield on the 10-year note could fall to 1.40% at the end of 2025, it said in a note on Tuesday.
Lending growth could stabilize by mid-year, when stimulus policies begin to lift certain sectors of the economy, economists say, leading to a slower decline in bond yields.
This was announced by the Central Bank of China on Friday temporarily stop buying government bonds due to excess demand and lack of supply in the market.
