(Bloomberg) – China’s central bank is struggling to increase lending to the economy despite lower interest rates and increased bank liquidity.
With a worsening Covid outbreak locking down megacities Shanghai and Shenzhen, worries about jobs and incomes mean businesses and consumers are unwilling to take on more debt. Banks are also hesitant to make more loans as a housing downturn drives up bad debt and cuts into profits.
This creates a challenge for the People’s Bank of China, which is expected to diverge further with a tightening of the US Federal Reserve possibly cutting key interest rates for the second time this year on Friday. Many economists also expect the central bank to reduce the amount of cash banks must hold in reserve, freeing up more money for lending.
The problem is that with restrictions aimed at containing the spread of omicron under China’s current Covid Zero strategy, which is keeping consumers on edge, any new stimulus could end up being parked in banks. rather than impacting the real economy.
“The demand for credit is so weak, but there is ample liquidity in the interbank market and banks are struggling to lend it,” said Helen Qiao, chief China economist at Bank of America. Since demand for credit is very weak, adjusting interest rates and reducing reserves is not the most effective form of monetary policy for China, she said.
With the monetary policies of the world’s two largest economies now heading in opposite directions, traditional yields on Chinese debt relative to US Treasuries have vanished for the first time since 2010. This could limit policy options for the PBOC, fearing that excessive easing would cause money to leave domestic markets.
In early March, Chinese leaders set an ambitious GDP growth target of around 5.5% for the year. Since then, the war in Ukraine has driven up energy costs, and virus outbreaks and shutdowns to contain infections have prompted economists to revise forecasts downward. The State Council, China’s cabinet, also pledged additional support.
Despite two cuts last year in the reserve requirement ratio – the level of deposits that lenders must lock in at the central bank – and an interest rate cut in January, China’s credit impulse, a measure of the ratio of new credit to gross domestic product produced, has slowed sharply in 2021 and has not yet recovered significantly.
The latest figures show a recovery in credit in March, largely due to an increase in local government bond sales and a seasonal increase as businesses ramped up borrowing after the Lunar New Year holiday. But growth in mortgages and long-term business loans remained weak, suggesting continued caution.
What Bloomberg economists say…
The transmission of monetary policy is a key issue for almost all central banks. The better the transmission, the more the central bank would be willing to ease policy if necessary.
Demand in the private sector in China has been weaker than before. This is an obstacle for the PBOC to maintain credit expansion.
David Qu, Chinese economist
The central bank recognized that it had a problem. At the end of March, the monetary policy committee promised to “unclog” the transmission system, the first time since the end of 2020 that it has been seized of the question.
For Xu Gao, chief economist at Bank of China International, the key to the return of credit lies in the property market, which remains under pressure after Beijing tightened restrictions last year to curb runaway prices and demand. debt.
“The main problem is the lack of trust,” he said. “Even though the banks have lowered mortgage rates, residents still dare not buy houses and take out mortgages because they fear that the buildings will not be finished and delivered.”
Signs of credit weakness are everywhere.
Even though the average business loan rate trended lower last year, the growth of new medium- and long-term business loans – reflecting demand for business capital investment – slowed in the first three months of this year compared to last year. Long-term household loans, a proxy for mortgage lending, declined for the first time in February and remain below levels seen in previous years.
And rather than a lack of cash, the banks are full of cash. The one-year interbank lending rate has been below the one-year medium-term lending facility policy interest rate since mid-2021, meaning it is cheaper for banks to borrow from each other than taking low-cost loans from the PBOC.
Even with all that cash, banks are struggling with low profitability and growing debt, making them less willing to lend.
John Beirne, vice president of research at the Asian Development Bank Institute, said central bank interest rate cuts were reducing banks’ net interest margins and, combined with high levels risk aversion and fear of taking on more debt, rate cuts may not be passed on to borrowers.
The amount of bad debts rose to 2.85 trillion yuan in the fourth quarter of last year, up about 18 percent from two years ago before the pandemic, according to figures from the China Securities Regulatory Commission. banks and insurance. Even though the non-performing loan ratio fell to 1.73% in the October-December period after a recent peak of 1.96% in 2020, it was still well above the level of around 1% a year ago. ten years.
The situation is probably worse in the smaller banks. The net profit of Guangzhou Rural Commercial Bank Co., for example, plunged 28.4% last year, mainly because it made more provisions for asset impairment to “improve its ability to withstand risks in a complex external environment and the epidemic,” the lender said. in its annual report. Credit write-downs jumped nearly 60 percent last year to 12.5 billion yuan ($2 billion), he said.
A weaker monetary policy transmission means the PBOC could opt for only a slight rate cut, a move that would be more intended to signal policy support, said Jing Sima, China strategist at BCA Research Inc.
“Our view is that the PBOC has done its job,” she said. “More rate cuts won’t do much to stimulate the real economy.”
Rather, it is regulatory policies that prevent central bank measures from being more effective, she said. Strict funding rules imposed on the property sector, tighter regulation of the internet sector and Covid Zero controls have all hurt private sector sentiment and demand for borrowing, she added.
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