SHENZHEN, CHINA – NOVEMBER 16: A boy sits outside a branch of the Bank of China while using a smartphone on November 16, 2024 in Shenzhen, Guangdong Province, China.
Cheng Xin | Getty Images News | Getty Images
Chinese commercial banks have a huge problem.
With consumers and businesses gloomy about the prospects of the world’s second-largest economy, loan growth has stalled. Beijing’s stimulus push has so far not been able to spur consumer credit demand, and is yet to spark any meaningful rebound in the faltering economy.
So what do banks do with their cash? Buy government bonds.
Chinese sovereign bonds have seen a strong rally since December, with 10-year yields plunging to all-time lows this month, dropping by about 34 basis points, according to LSEG data.
“The lack of strong consumer and business loan demand has led the capital flows into the sovereign bonds market,” said Edmund Goh, investment director of fixed income at abrdn in Singapore.
That said, “the biggest problem onshore is a lack of assets to invest,” he added, as “there are no signs that China can get out of deflation at the moment.”
Total new yuan loans in the 11 months through to November 2024 fell over 20% to 17.1 trillion yuan ($2.33 trillion) from a year ago, according to data released by the People’s Bank of China. In November, the new bank lending stood at 580 billion yuan, versus 1.09 trillion yuan a year earlier.
Loan demand has failed to pick up despite a sweeping stimulus measures that Chinese authorities started unveiling since last September, when the economy verged on missing its full-year growth target of “around 5%.”
Goldman Sachs sees growth in the world’s second-largest economy slowing to 4.5% this year, and expect credit demand in December to have slowed further from November.
“There is still a lack of quality borrowing demand as private enterprises remain cautious with approving new investments and households are also tightening purse strings,” said Lynn Song, chief economist at ING.
For this year, authorities have vowed to make boosting consumption a top priority and to revive credit demand with lower corporate financing and household borrowing costs.
Investors may continue to look for “sources of risk-free yield” this year due to the high level of uncertainty amid potential tariff action from abroad, Song said, noting “some question marks still remaining on how strong domestic policy support will be.”
annual inflation in 2024 stood at 0.2%, signaling that prices barely grew, while wholesale prices continued to fall, down 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 forceful policy push, said Zong Ke, portfolio manager at Shanghai-based asset manager Wequant.
Ke said the current policy interventions are merely “efforts to prevent economic collapse and cushion against external shocks” and “simply to avoid a freefall.”
nearing levels last seen in April.
The widening yield differentials between Chinese and U.S. sovereign bonds could risk encouraging capital outflows and put further pressure on the yuan that has been weakening against the greenback.
Chinese onshore yuan hit a 16-month low against the dollar on Wednesday, while the offshore yuan has been on a multi-month slide since September.
“You have the perfect storm,” said Sam Radwan, founder of Enhance International, naming the lower government bond yields, prolonged real estate crisis and impacts from rising tariffs as risk factors, weighing on foreign investors’ sentiment with onshore assets.
While reducing the appeal of China bonds among foreign investors, the widened yield differentials with U.S. Treasuries has little impact on the performance of Chinese government bonds due to the “small share of foreign funds,” said Winson Phoon, head of fixed income research, Maybank Investment Banking Group.
