Chinese banks have cut traditional lending due to economic concerns

Chinese banks rushed to meet their annual lending quotas imposed by the state last month by buying low-risk financial instruments instead of lending, an increase that bankers and analysts say reflects financial institutions’ caution about slowing the country’s economy.

Rising demand for bank acceptances, guaranteed by their issuers and technically classified as loans, reduced interest rates paid by banks to close to zero percent in the second half of December. A record low of 0.007 percent was reached on December 23rd.

This was far lower than the average cost of Chinese banks ’capital of 2.5 percent over the same period, implying that they would rather lose money on low-yield bankers’ receipts rather than risk higher losses by issuing their own loans at higher interest rates.

President Xi Jinping’s administration wants banks to lend more, especially to small and medium-sized enterprises in government sectors such as agriculture and new energy vehicles. However, banks are reluctant to do so because they trust the Chinese economic slowdown reduced the number of eligible borrowers.

Loan officials said buying bankers to meet their credit quotas at the end of the year is the surest way to support government policy goals.

“Supporting the wider economy is a political task to which we cannot say no,” said Zhongyuan Bank CEO Zhengzhou, who asked not to be named. “Our losses from buying bank certificates are less than lending to unqualified companies.”

Companies use bankers’ acceptances as a form of payment, which the holder can buy from the issuer’s bank. They can also be bought and sold in open markets, such as the Shanghai Commercial Paper Exchange.

Credit officials told the Financial Times that Xi regulatory shock hit many of its best borrowers in sectors such as real estate and private education, with no indication that conditions will soon improve.

“The authorities want us to support the real economy while keeping bad debts under control,” said a loan officer at Zheshang Bank in Hangzhou, who asked not to be named. “It’s hard to achieve in the current business environment.”

Bo Zhuang, a Singaporean analyst at Loomis Sayles, asset manager, added: “This is a conundrum that the current policy mix cannot solve.”

China’s total social financing, the broadest measure of credit supply, saw three consecutive double-digit declines annually from July to September, reflecting the government’s efforts to inflate the housing balloon by tightening mortgage lending.

The credit crunch has pushed China Evergrande Group and other investors with excessive indebtedness in non-payment, delaying the completion of apartments financed by advance payments of house buyers.

Central and local government officials have begun harassing protesters, as well as protesters small investors who bought investment products issued by the developer and unpaid construction workers could jeopardize social stability.

This has led to a moderate change in monetary policy as China’s central bank unveiled a series of measures last month, including a reduction in the benchmark credit rate and mandatory reserves for pumping liquidity into the real economy after several months of tightening.

Communist Party officials have vowed not to deviate from their larger political goals, which include a more affordable housing market and greater restrictions on “disorderly capital expansion” – a political code for tighter regulation of some of the country’s largest private sector companies.

But at their year-end policy meeting in December, they also stressed the importance of stabilizing the economy ahead of this year’s 20th party congress, where Xi is expected to ensure an unprecedented third term as head of the party, army and government.

Additional reporting by Tom Mitchell of Singapore

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