Chinese banks rushed last month to meet their annual government-imposed loan quotas by buying up low-risk financial instruments rather than issuing loans, in a boom that bankers and analysts said the financial institutions’ caution over the country’s slower economy.
The increase in demand for banker acceptances, guaranteed by their issuers and technically classified as loans, reduced the interest paid by banks to almost zero percent in the second half of December. A record low of 0.007 percent was reached on December 23.
This was much lower than Chinese banks’ average cost of capital of 2.5 percent over the same period, implying that they chose to lose money on low-yield bankers acceptance rather than risking larger losses through their own loans at higher interest rates. to reach.
President Xi Jinping’s administration wants banks to lend more, especially to small and medium-sized enterprises in government-favored sectors, such as agriculture and new energy vehicles. However, banks are reluctant to do so because they believe China’s slower economy has reduced the pool of qualified lenders.
Loan officials said buying up bankers’ acceptances to meet their year-end loan quotas is the safest way to support the government’s policy objectives.
“Supporting the broader economy is a political task for which we can not say no,” said a Zhongyuan Bank executive in central Zhengzhou, who asked not to be named. “Our losses due to the purchase of bank insurance are smaller than loans to unqualified businesses.”
Companies use bank acceptances as a form of payment, which can redeem the holder at the issuing bank. They can also be bought and sold on open markets, such as the Shanghai Commercial Paper Exchange.
Loan officials told the Financial Times that Xi’s regulatory repression has hit many of their best lenders in sectors such as real estate and private education, with no sign that conditions would improve any time soon.
“The authorities want us to support the real economy while keeping bad debts under control,” said a lending official at Zheshang Bank in Hangzhou, who asked not to be identified. “It is difficult to achieve in the current business environment.”
Bo Zhuang, a Singapore-based analyst at Loomis Sayles, an asset manager, added: “This is a mystery that the current policy mix cannot solve.”
China’s total social funding, the broadest measure of credit supply, reported three consecutive double-digit declines year-on-year from July to September, reflecting the government’s efforts to defuse the housing bubble by sharpening mortgage lending.
The credit crunch hit China Evergrande Group and other developers who have failed, hindering the completion of apartments funded by prepayments from homebuyers.
Central and local government officials have begun to worry that protests by aggrieved homebuyers, as well as retail investors, who bought developer-issued investment products, and unpaid construction workers, could threaten social stability.
This has led to a moderate shift in monetary policy as China’s central bank unveiled a series of measures last month, including cuts in a benchmark lending rate and reserve requirements, to pump liquidity into the real economy after several months of tightening.
Communist party officials have vowed not to deviate from their larger policy goals, including a more affordable housing market and greater restrictions on the “disorderly expansion of capital” – political code for stricter regulation of some of the country’s largest private sector companies .
But during their year-end policy meeting in December, they also stressed the importance of stabilizing the economy in the run-up to this year’s 20th party congress, at which Xi is expected to have an unprecedented third term as head of party, military and government.
Additional post by Tom Mitchell in Singapore