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SHENZHEN, CHINA – NOVEMBER 16: A boy sits outside a Bank of China branch while using a phone on November 16, 2024 in Shenzhen, Guangdong Province, China.
Cheng Xin | Getty Images News | Getty Images
China’s commercial banks have a big problem.
As consumers and businesses remain gloomy about the outlook for the world’s second-largest economy, loan growth has stalled. Beijing’s stimulus push has so far failed to stimulate demand for consumer credit, and is 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 rallied sharply since December, with 10-year yields plunging to all-time lows, down about 34 basis points, according to LSEG data.
“The lack of strong demand for consumer and business loans has driven capital flows into the sovereign bond market,” said Edmund Goh, director of fixed income investments at abrdn in Singapore.
That said, “the biggest problem on land is the lack of assets to invest”, he added, “because at the moment there is no sign that China can get out of 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 ago, According to data released by the People’s Bank of China. Again in November new bank loans were 580 billion yuancompared to 1.09 trillion yuan a year earlier.
Loan demand has not picked up despite major stimulus measures unveiled by Chinese authorities since last September, when the economy missed 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 from November.
“There is still a lack of demand for quality loans as private companies remain cautious in accepting new investments and households are also tightening their purse strings,” said Lynn Song, chief economist at ING.
For this year, the authorities have vowed to make boosting consumption a top priority and stimulate credit demand with lower borrowing costs for businesses and households.
Investors may continue to seek “sources of risk-free returns” this year amid a high level of uncertainty amid tariff action from abroad, Song said, adding that “some question marks remain as to how strong domestic policy support will be.”
There is no better alternative
The mortgage slowdown that fueled credit demand is still rock bottom, said Andy Maynard, China Renaissance’s chief executive and equity director.
China’s onshore investors “face a lack of investable assets to put money into, both in the financial market and the physical market,” he added.
Thursday’s official data showed China’s annual inflation was 0.2% in 2024.indicating that prices barely increased, while wholesale prices continued to fall, down 2.2%.
Institutions are increasingly bullish on government bonds on the assumption that economic fundamentals will remain weak, with hopes of a strong policy push fading, said Zong Ke, portfolio manager at Shanghai-based asset manager Wequant.
Ke said that the current policy interventions are merely “efforts to prevent economic collapse and mitigate against external shocks” and “merely to prevent a free fall”.
‘The Perfect Storm’
The yield on the 10-year US Treasury has been rising at its fastest pace since June and Wednesday’s rise lifted the yield to 4.7%. they are approaching the levels last seen in April.
Widening yield differentials between Chinese and US sovereign bonds could risk fueling capital outflows and put further pressure on the yuan, which is weakening against the greenback.
China’s onshore yuan hit a 16-month low against the dollar on Wednesday, while the offshore yuan hit a multi-month low since September.
“You have a perfect storm,” said Sam Radwan, founder of Enhance International, citing lower government bond yields, a prolonged housing crisis and the effects of rising rates as risk factors, with foreign investors feeling dry with assets.
While reducing the attractiveness of Chinese bonds among foreign investors, widening yield differentials with U.S. Treasuries have little impact on Chinese government bond yields because of the “small share of foreign funds,” said Winson Phoon, Maybank head of fixed income research. Investment Banking Group.
The silver lining
Falling yields offer Beijing a silver lining — lower funding costs — as policymakers expect new bond issuance to increase this year, ING’s Song said.
Beijing unveiled a $1.4 trillion debt swap program in November aimed at easing a funding crisis for local governments.
“For much of 2024, policymakers acted to intervene whenever the 10-year yield hit 2%,” Song said, noting that the PBOC “quietly stopped intervention” in December.
Investors expect the central bank to unveil new monetary easing steps this year, such as additional cuts in the key interest rate and the amount of money banks must hold as reserves. at the turn of the year The PBOC said it will cut interest rates “at the right time”.
“The bank will enrich and improve its monetary policy tools, buy and sell treasury bonds and look at long-term yield movements,” he said. statement of January 3.
Expectations of rate cuts, however, will only keep bonds rallying.
Economists at Standard Chartered Bank see the rise in bonds continuing this year, but at a slower pace. The 10-year yield could fall to 1.40% by the end of 2025, they said in a note on Tuesday.
Credit growth may stabilize by mid-year as stimulus policies begin to lift some sectors of the economy, economists said, leading to a slower decline in bond yields.
China’s central bank said this on Friday it would temporarily stop buying government bonds due to excess demand and insufficient market supply.
