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SHENZHEN, CHINA – NOVEMBER 16: A boy stands outside a Bank of China branch while using 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.
With consumers and businesses downbeat about the outlook for the world’s second-largest economy, loan growth has remained stagnant. Beijing’s stimulus push has so far failed to boost demand for consumer credit, and has yet to spark a significant rebound in the faltering economy.
So what do banks do with their money? Buy government bonds.
Chinese sovereign bonds have seen a strong rally since December, with 10-year 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 corporate loans has driven capital flows into the sovereign bond market,” said Edmund Goh, director of fixed income investment at abrdn in Singapore.
That said, “the biggest problem on earth is the lack of assets to invest,” he added, since “there are no signs that China can get out of deflation at the moment.”
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 ago, according to data published by the People’s Bank of China. In November, the The new bank loan was 580 billion yuanversus 1.09 trillion yuan a year earlier.
Loan demand has failed to pick up despite extended stimulus measures that Chinese authorities began rolling out last September, when the economy was close to missing its full-year growth target of “about 5%”.
Goldman Sachs sees growth in the world’s second-largest economy slowing to 4.5% this year, and expects credit demand in December to have slowed further from November.
“There is still a lack of demand for quality loans as private companies remain cautious about approving new investments and households are also tightening their purse strings,” said Lynn Song, chief economist at ING.
For this year, the authorities have promised to make strengthening consumption a top priority and to revive credit demand with lower corporate financing and household borrowing costs.
Investors may continue to seek “sources of risk-free yield” this year due to the high level of uncertainty amid potential rate action from abroad, Song said, noting “some question marks remain always on how strong the support of domestic politics will be.”
No better alternative
The slowdown in lending comes as mortgages, which used to fuel demand for credit, are still in the bottom stage, said Andy Maynard, managing director and head of equities at China Renaissance.
Chinese onshore investors will face a lack of “investable assets to put money into, both in the financial market and in the physical market,” he added.
Official data on Thursday showed China Annual inflation in 2024 was 0.2%indicating that prices barely grew, while wholesale prices continued to fall, 2.2%.
Institutions are increasingly bullish on government bonds due to the belief that economic fundamentals will remain weak, coupled with fading hopes for a strong political push, said Zong Ke, portfolio manager at asset manager Wequant. based in Shanghai.
Ke said that the current policy interventions are only “efforts to prevent economic collapse and cushion against external shocks” and “simply to avoid a free fall”.
“Perfect Storm”
The yield on the 10-year US Treasury rose at its fastest pace since June and a peak on Wednesday sent the yield to a higher 4.7%, almost levels last seen in April.
Widening yield differentials between Chinese and US sovereign bonds could risk encouraging capital outflows and put more pressure on the yuan which has been weakening against the greenback.
The Chinese onshore 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 the perfect storm,” said Sam Radwan, founder of Enhance International, citing lower government bond yields, the protracted housing crisis and the impacts of rising tariffs as risk factors. , weighing on the sentiment of foreign investors with onshore assets.
While reducing the appeal of China bonds among foreign investors, the widening of yield differentials with US Treasuries has little impact on the yield of Chinese government bonds due to the “small part of foreign funds,” said Winson Phoon, head of fixed income research, Maybank. Investment Banking Group.
Silver lining
Falling yields offer a silver lining to Beijing – lower funding costs – as policymakers are expected to rein in new bond issuance this year, ING’s Song said.
Beijing unveiled a $1.4 trillion debt swap program in November, aimed at easing the local government’s funding crisis.
“For most of 2024, policymakers acted to intervene whenever 10-year yields hit 2%,” Song said, noting that the PBOC had “quietly halted intervention” in December.
Investors expect the central bank to unveil new monetary easing steps this year, such as additional cuts to the main interest rate and the amount of money banks must hold as reserves. At the turn of the year, PBOC said it will cut key interest rates at an “appropriate time”.
“The bank will enrich and improve the monetary policy toolkit, conduct the purchase and sale of treasury bonds and pay attention to the movements of long-term yields,” according to the statement of January 3.
The prospect of rate cuts, however, is only keeping bonds rallying.
Economists at Standard Chartered Bank see the bond rally to continue this year but at a slower pace. The 10-year yield may fall to 1.40% by the end of 2025, they said in a note on Tuesday.
Credit growth may stabilize in the middle of the year, as stimulus policies begin to lift some sectors in the economy, economists said, leading to a slower decline in bond yields.
The Central Bank of China said on Friday that would temporarily halt purchases of government bonds due to excessive demand and short supply in the market.
