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SHENZHEN, CHINA – NOVEMBER 16: A boy sits outside a Bank of China branch while using a smartphone on November 16, 2024 in Shenzhen, Guangdong province, China.
Cheng Xin | Getty Images News | fake images
Chinese commercial banks have a huge problem.
While consumers and businesses are pessimistic about the prospects 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 has yet to spark any significant rebound in the faltering economy.
So what do banks do with your cash? Buy government bonds.
Chinese sovereign bonds have seen a strong rally since December, with 10-year yields falling to record lows this month, falling around 34 basis points, according to LSEG data.
“The lack of strong consumer and corporate lending demand has led to capital flows into the sovereign bond market,” said Edmund Goh, chief investment officer of fixed income at abrdn in Singapore.
That said, “the biggest problem in the country is the lack of assets to invest in,” he added, as “there are no signs that China can get out of deflation at this time.”
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 New bank loans amounted to 580 billion yuan.compared to 1.09 trillion yuan the previous year.
Loan demand has failed to recover despite extensive stimulus measures that Chinese authorities began unveiling since last September, when the economy came close to missing its full-year growth target of “around 5%.” “.
Goldman Sachs expects growth in the world’s second-largest economy to slow to 4.5% this year, and expects credit demand in December to have slowed further from November.
“Demand for quality loans is still lacking as private companies remain cautious about approving new investments and households are also tightening their finances,” said Lynn Song, chief economist at ING.
For this year, the authorities have promised to make boosting consumption a top priority and reactivate credit demand with lower corporate financing and household borrowing costs.
Investors may continue to look for “sources of risk-free returns” this year due to the high level of uncertainty amid possible tariff action from abroad, Song said, noting that “some questions still remain about how strong the support from the internal politics”.
There are no better alternatives
The slowdown in lending comes as mortgages, which used to drive credit demand, are still in the bottoming stage, said Andy Maynard, managing director and head of equities at China Renaissance.
Local Chinese investors have to deal with a lack of “investable assets to invest in, both in the financial market and the physical market,” he added.
Official data on Thursday showed that China annual inflation in 2024 stood at 0.2%which indicates 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 policy push, said Zong Ke, portfolio manager at the fund manager. Shanghai-based Wequant assets.
Ke said current policy interventions are simply “efforts to prevent economic collapse and protect against external shocks” and “simply to avoid a free fall.”
‘Perfect storm’
The 10-year U.S. Treasury yield has risen at the fastest pace since June, and a rise on Wednesday pushed the yield above 4.7%. approaching levels last seen in April.
Rising yield spreads between Chinese and U.S. sovereign bonds could encourage capital outflows and put further pressure on the yuan, which has been weakening against the dollar.
The onshore Chinese yuan hit a 16-month low against the dollar on Wednesday, while the offshore yuan has been in decline for several months since September.
“We have the perfect storm,” said Sam Radwan, founder of Enhance International, naming lower government bond yields, the prolonged housing crisis and the impacts of rising tariffs as risk factors, weighing on investor confidence. foreigners with local assets.
While reducing the attractiveness of Chinese bonds among foreign investors, widening yield spreads with U.S. Treasuries have little impact on Chinese government bond yields due to the “small proportion of foreign funds,” Winson Phoon said. , head of fixed income research at Maybank. Investment Banking Group.
Silver lining
Falling yields offer a silver lining for Beijing – lower funding costs – as policymakers are expected to increase new bond issuance this year, ING’s Song said.
Beijing unveiled a $1.4 trillion debt swap program in November aimed at easing the funding crisis for local governments.
“For much of 2024, authorities moved to intervene whenever 10-year yields hit 2%,” Song said, noting that the People’s Bank of China had “quietly stopped intervention” in December.
Investors expect the central bank to unveil new monetary easing measures this year, such as further cuts to the main interest rate and the amount of cash banks must hold as reserves. At the beginning of the year, The People’s Bank of China said it will cut key interest rates at an “appropriate time.”
“The bank will enrich and improve the monetary policy toolkit, make purchases and sales of Treasuries and pay attention to movements in long-term yields,” according to the statement of January 3.
However, the prospect of rate cuts will only keep bonds rallying.
Economists at Standard Chartered Bank believe the bond rally will continue 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 could stabilize by mid-year as stimulus policies begin to boost certain sectors of the economy, economists said, leading to a slower decline in bond yields.
China’s central bank said on Friday that would temporarily suspend the purchase of government bonds due to excess demand and shortage of supply in the market.
