Chinese banks rushed to meet their annual state-imposed lending quotas last month by buying up low-risk financial instruments rather than issuing loans, a surge that bankers and analysts said reflected financial institutions’ wariness about the country’s slowing economy.
The rise in demand for banker’s acceptance bills, which are guaranteed by their issuers and technically classified as loans, reduced the yield on the instruments to close to zero per cent in the second half of December, hitting a record low of 0.007 per cent on December 23.
That was far lower than Chinese banks’ average 2.5 per cent cost of capital over the same period, implying that they preferred to lose money on low-yielding banker’s acceptance bills rather than risking greater losses by issuing their own loans at higher rates of interest.
Lenders issue banker’s acceptance bills to clients that have deposit accounts or other collateral. The clients can then use the bills, which are guaranteed by the issuing bank, as a promise of future payment to counterparties, and can also cash the bills but at a discount to face value.
The bills, which are often used in international trade, can also be bought and sold on open markets, such as the Shanghai Commercial Paper Exchange.
President Xi Jinping’s administration wants banks to lend more, especially to small and medium-sized enterprises in government favoured sectors such as agriculture and new energy vehicles. Banks are reluctant to do so, however, because they believe China’s slowing economy has reduced the pool of qualified borrowers.
Loan officers said buying up banker’s acceptances to meet their year-end lending quotas was the safest way to back the government’s policy objectives.
“Supporting the broader economy is a political task we can’t say ‘no’ to,” said an executive at Zhongyuan Bank in the central city of Zhengzhou who asked not to be named. “Our losses from buying banker’s assurances are smaller than lending to unqualified businesses.”
Loan officers told the Financial Times that Xi’s regulatory crackdown had hit many of their best borrowers in sectors such as real estate and private education, with no sign that conditions would improve soon.
“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 identified. “That is difficult to achieve in the current business environment.”
Bo Zhuang, a Singapore-based analyst at Loomis Sayles, an asset manager, added: “This is a conundrum the current policy mix can’t solve.”
China’s total social financing, the broadest measure of credit supply, reported three consecutive double-digit declines year on year from July to September, which reflected the government’s efforts to deflate the housing bubble by tightening mortgage lending.
The credit crunch has pushed China Evergrande Group and other overleveraged developers into default, stalling the completion of apartments funded by advance payments from homebuyers.
Central and local government officials have begun to fret that protests by aggrieved homebuyers, as well as retail investors who bought developer-issued investment products and unpaid construction workers, could threaten social stability.
That led to a moderate shift in monetary policy as China’s central bank last month unveiled a clutch of measures, including cuts in a benchmark lending rate and reserve requirements to pump liquidity into the real economy following several months of tightening.
Communist party officials have vowed not to deviate from their larger policy goals, which include a more affordable housing market and greater restraints on the “disorderly expansion of capital” — political code for tighter regulation of some of the country’s biggest private sector companies.
But at their year-end policy meeting in December, they also emphasised the importance of stabilising the economy in the run-up to this year’s 20th party congress, at which Xi is expected to secure an unprecedented third term as head of the party, military and government.
Additional reporting by Tom Mitchell in Singapore