China’s four big state-owned banks are reportedly resisting pressure from government planners to offer cheaper loans even as officials want lower interest rates to finance the 700 billion yuan ($110 billion) of infrastructure projects being advanced to stimulate the slowing economy. According to the 21st Century Business Herald (in Chinese), the banks are fearful of the squeeze on their profits and balance sheets while they are still potentially carrying scads of bad debt on their books from the 4 trillion yuan stimulus that followed the 2008 global financial crisis.
Local governments have budgeted for less than a third of the cost of the latest round of investment spending on roads and railways. The rest will have to be covered with bank loans. The banks’ credit quotas for the year still have room to accommodate this. The question is at what rates and to what extent private borrowing is priced out. Bloomberg reports that the banks are already limiting their corporate clients to 10% discounts of the benchmark lending rate, even though they have been free since July to offer up to 30% discounts, a move made by the central bank to encourage business borrowing. There are also concerns that banks are delaying new consumer loans. A case of what one hand stimulates, the other discourages.
China looks set to give a big boost to its nascent muni-bond market this year. The Finance Ministry is to quintuple the quota for local government bond issuance to 250 billion yuan ($40 billion) this year, Caixin reports.
In addition, more provinces will reportedly be added to the list of those able to issue bonds directly. Since 1994, the ministry has done that on behalf of local governments but started an experiment in direct issuance in October last year with Shanghai, Shenzhen, Guangdong and Zhejiang. That privilege will be extended to six more provinces and municipalities. The ministry is expected to maintain the close control over the bond issuance by the larger group that it has exercised over the trial quartet, including having a big say over what the funds raised can be used for.
Expanding the muni-bond market is both part of the broader reforms of the financial system and local government finances. The latter are teetering under the burden of 10.7 trillion yuan of debt, at least 3 trillion yuan of which falls due by the end of this year. Much of the debt piled up as a result of the stimulus spending in the wake of the 2008 global financial crisis. Much of it is infrastructure loans, for things like toll roads to nowhere, that are weighing heavily on the creditworthiness of China’s banks.
Earlier this month the China Banking Regulatory Commission ordered banks to clean up their balance sheets with regard to local government lending. It first told them to do that in June last year, but progress clearly hasn’t been rapid enough, or, as a result of the cooling of both the economy and the property market, problem loans are mounting. Good and bad loans alike were probably rolled over when banks tackled the 2 trillion yuan of local government loans that fell due last year. Another red flag raised by China’s audit office: irregularities it has found with 530 billion yuan worth of the lending. Taken together, an estimated 2 trillion-3 trillion yuan of local government lending has soured, which would be sufficient to raise the banks’ non-performing loan ratios to 5% from their current average of 1.1%.
The new quota of 250 billion yuan for bond issuance won’t wipe away the problem but every little bit helps–though places like Greece serve as a reminder that bond issuance is not an infallible inoculation against the highly contagious disease of government fiscal profligacy. Yet while the immediate priority is to deflate China’s local-government debt bubble before it can go damagingly pop, an expanded muni-bond market also pushes provincial and municipal governments in three other desirable directions: less reliance of land sales to raise revenue, less need for the off-balance sheet financing via captive investment vehicles that local authorities have resorted to get round restrictions on official borrowings, and more transparency generally about their finances.
This Bystander was not alone in being surprised to see that new bank lending in October rose to 587 billion yuan ($92.5 billion) from September’s 480 billion yuan, suggesting the People’s Bank of China was easing credit conditions a bit. Yet at the same time the increase in the broad measure of the money supply, M2, decreased to 12.9% from 13%, suggesting the central bank had done no such thing. The increase in October’s new bank lending may reflect more an anything the big state-owned banks getting some of their off-balance sheet loans back on their books as policymakers try to get to grips with the large and potentially destabilizing informal lending sector.
Inflation, though moderating, remains persistently high and above official target. Growth, too, is slowing, but is also ahead of target, and there are signs that holiday season retail spending in China’s export markets in developed economies, and particularly the U.S., will not be as dire as first forecast. We still don’t believe that policymakers are ready quite yet to ease monetary policy in any significant way, even if they are standing ready to do so if necessary and are letting money-market rates soften a tad to keep a finger in the wind.
To our mind, the new bank lending numbers, for the first five months of this year, and the slowest expansion of credit since 2008, do not signal much by way of a slowdown in the economy, or at least not by as much as some commentators suggest. Our sense is much more that central government is enforcing its lending quotas on local governments more effectively than it has done in the past, as well as shifting some money into capital reserves as a result of higher capital ratio requirements imposed on the big banks.
We also note that the money supply, on its broad M2 measure, was still up 15.1% in May over the same point a year ago. Inflation is still persistently and unacceptably high, suggesting further interest rate rises are likely. Growth will be kept robust enough to absorb them.
That all said, as bank lending quotas are one of the best of the few tools of monetary policy that the central bank possesses, we are seeing some reigning in of the expansionary stimulus that followed the 2008 global financial crisis, as is central bank policy. Yet, as ever, what the government takes away, it can give back if circumstances demand it.
Quite how fast is China’s economy growing? The Financial Times’s Lex column run’s Li Keqiang’s informal but crunchy measures of economic growth, the ones mentioned in a Wikileaked U.S. embassy cable from 2007: electricity consumption, rail cargo volume and bank lending. Lex finds that:
The first two are at full throttle: electricity consumption rose almost 15% last year, 8 percentage points more than in 2009, while freight traffic’s 10% growth over the first 11 months was about double the five-year average. New loans of 480 billion yuan last month, meanwhile, were 10 times their level of December 2007.
Those numbers suggest that the official GDP figures have yet to catch up.
Another rise in banks’ reserve requirements to rein in credit expansion. That’s the second within a month and a sign of the growing concern among authorities about the potential for stimulus-inflated stock and real estate bubbles and the accompanying bad bank debt. This time the increase in required capital reserves ratios is another half a percentage point, taking it to 16.5%. The ratio for smaller institutions, such as rural credit cooperatives, is left unchanged at 14.5% in order to keep credit available to farmers, the People’s Bank of China announced.
The new reserve requirements come a day after the government reported that new bank lending in January, at 1.4 trillion yuan ($200 billion), though down 14% on a year earlier had already reached nearly one fifth of the year’s planned total of 7.5 trillion yuan. Lending is usually heavier in the earlier months of the year, but authorities don’t want the annual target blasted through as cavalierly as it was last year.
Pay less notice to the latest monthly industrial production and retail sales figures — both up 16% in October from a year before, with the trade surplus almost doubling from September, to $24 billion, as the contraction in exports eased to its slowest pace this year — and more to the subsequent statement by the central bank that foreign-exchange policy will take into account global capital flows and changes in major currencies.
Recently it has been saying the aim is to keep the yuan stable, and has effectively pegged the currency to the U.S. dollar, not so much to boost exports as to maintain the value of its U.S. dollar denominated assets. Does the change in language indicate the central bank is preparing to let the currency strengthen as the economy recovers? Or is it more a symbolic gesture ahead of U.S. President Obama’s forthcoming visit during which the dollar will be a topic of discussion? We suspect the latter, and are sure that if there is change it will happen slowly and gradually.
What seems more certain is that the central bank is preparing to rein in some of the lending it has encouraged to stimulate the economy. A lot of that money has found its way into frothy looking equity and property markets, which worry policy makers in a way consumer inflation doesn’t. Credit growth eased in October. New loans fell to RMB 253 billion from September’s RMB 517 billion, though the fourth quarter usually sees new lending dialed back. Late last month, the State Council said that monetary policy would remain “appropriately loose”. Now the central bank is saying “moderately loose“, for which read tighter, if only a bit more than what we have already seen since summer.
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