SHENZHEN, CHINA – NOVEMBER 16: A boy sits in front of a branch of the Bank of China and uses a smartphone on November 16, 2024 in Shenzhen, Guangdong province, China.
Cheng Xin | News from Getty Images | Getty Images
Chinese commercial banks have a huge problem.
With consumers and businesses concerned about the prospects for the world's second-largest economy, credit growth has stalled. Beijing's stimulus programs have so far been unable to stimulate demand for consumer loans and have yet to spark any significant revival in the flagging economy.
So what do banks do with their money? Buy government bonds.
Chinese government bonds have rallied strongly since December, with 10-year bond yields falling to all-time lows this month, down about 34 basis points, according to LSEG data.
“The lack of strong demand for consumer and business loans has led to capital inflows into the government bond market,” said Edmund Goh, chief investment officer of fixed income at abrdn in Singapore.
That said, “the biggest problem onshore is the lack of assets to invest in,” he added, as “there is currently no sign that China can emerge from deflation.”
Total new yuan loans in the 11 months to November 2024 fell more than 20% to 17.1 trillion yuan ($2.33 trillion) from a year earlier, – according to data published by the People's Bank of China. In November the amount of new bank loans was 580 billion yuancompared to 1.09 trillion yuan a year earlier.
Demand for loans has failed to pick up despite the sweeping stimulus measures that Chinese authorities began unveiling last September, when the economy was close to hitting its full-year growth target of “around 5%.”
Goldman Sachs predicts growth in the world's second-largest economy will slow to 4.5% this year and expects loan demand to fall further in December compared with November.
“Demand for high-quality loans remains lacking as private companies remain cautious in approving new investments and households also tighten limits,” said Lynn Song, chief economist at ING.
The authorities have promised to make increasing consumption a top priority this year and revive demand for loans with lower costs of corporate financing and household loans.
Investors may continue to look for “sources of risk-free profit” this year due to high levels of uncertainty over potential tariff actions from abroad, Song said, noting that “some question marks remain as to how there will be strong support from national policy.”
There are no better alternatives
The slowdown in lending comes at a time when mortgage lending, which once fueled loan demand, is still at an all-time low, said Andy Maynard, managing director and head of equities at China Renaissance.
Chinese onshore investors face a lack of “assets in which to invest, both in the financial and physical markets,” he added.
Official data on Thursday showed data from China annual inflation in 2024 was 0.2%signaling that prices barely increased while wholesale prices continued to decline, by 2.2%.
Institutions are increasingly bullish on government bonds due to a belief that economic fundamentals will remain weak, coupled with fading hopes for a decisive political push, said Zong Ke, portfolio manager at Shanghai-based asset management firm Wequant.
Ke said current policy interventions are merely “efforts to prevent economic collapse and mitigate external shocks” and “simply avoid a sharp decline.”
“The Perfect Storm”
The 10-year U.S. Treasury yield has been rising at a faster pace since June, and Wednesday's sharp rise pushed the yield to a high of 4.7%. approaching levels last seen in April.
Growing differences in Chinese and US government bond yields may risk encouraging capital outflows and put further pressure on the yuan, which is weakening against the dollar.
China's onshore yuan hit a 16-month low against the dollar on Wednesday, while the offshore yuan has been declining for months since September.
“We have a perfect storm,” said Sam Radwan, founder of Enhance International, citing lower government bond yields, a prolonged housing crisis and the impact of rising tariffs as risk factors weighing on foreign investor sentiment toward onshore assets.
Increased spreads in U.S. Treasury yields reduce the attractiveness of Chinese bonds among foreign investors but have little impact on the performance of Chinese government bonds due to the “low participation of foreign funds,” said Winson Phoon, head of fixed income research at Maybank Investment Banking Group.
The silver lining
Falling yields are a consolation for Beijing – lower financing costs – as policymakers are expected to increase new bond issuance this year, said ING's Song.
In November, Beijing announced a $1.4 trillion debt swap program aimed at easing the local government financing crisis.
“For most of 2024, policymakers took action to intervene whenever the 10-year bond yield reached 2%,” Song said, noting that in December the PBOC “quietly stopped intervening.”
Investors expect the central bank to unveil new monetary easing steps this year, such as additional cuts to the key interest rate and the amount of cash banks must hold in reserves. At the turn of the year, PBOC announced a cut in key interest rates at the “right time”.
“The bank will enrich and improve the set of monetary policy tools, buy and sell treasury bonds and pay attention to changes in yields in the long term,” he says. statement of January 3.
However, the prospect of rate cuts will only keep bonds rising.
Economists at Standard Chartered Bank believe the rise in bond prices will continue this year, but at a slower pace. Tuesday's note said the 10-year bond yield could fall to 1.40% by the end of 2025.
Economists say credit growth could stabilize by mid-year as stimulus policies begin to revive some sectors of the economy, leading to a slower decline in bond yields.
China's central bank said on Friday that it did would temporarily suspend the purchase of treasury bonds due to excess demand and low supply in the market.