January’s extraordinary loan growth might have increased household savings and poured funds into the stock market.
Shen Minggao and economist He Yin, Caijing 23 February 2009
The 1.6 trillion yuan that Chinese banks lent in January comes as a shock. It is as much as one third of the loans granted in 2008.
Once the shock subsides, your next thought is, ‘Well, no wonder.’ The central bank lifted the credit cap last year, enabling banks to lend as much as they want. Add on that banks suspect profit margins for loans will narrow if the central bank continues to cut interest rates and you have the beginnings of an answer. Right now, it’s in the interests of banks to grant as many loans as they can before rates get cut again.
It is also worth noting that over 600 billion of the new “loans” were actually commercial papers. Banks seem to have raced to expand their credit business before the government tightens controls again. Thus, they bought as much commercial paper as possible, which is easier than originating loans.
But, where have the loans gone? They might go in three directions: toward deposit accounts where they sit, toward business investments, or toward equity markets where they’re used to buy stocks. It looks like the latter option may have absorbed a fair share of the new liquidity.
When companies get a loan, they can put a portion of the money in their business accounts, use a portion to raise capital and buy bonds, and keep the rest in hand for immediate uses. Deducting the amount money that went into these four outlets, there was still 830 billion yuan of the January loans that cannot be explained – that’s 500 to 600 billion more yuan compared to the previous two years. This chunk of untracked money probably found its way into the stock market, awaiting the rebound of share prices. We found strong correlation of 0.66 between the unexplainable part of increased loans and the price hike of Shanghai stock index in the last three years.
Deposit accounts also seem to have housed a large portion of the new loans. The deposit balance rose a surprising 1.53 trillion yuan in January, 60 percent more than last February in which 2008’s Spring Festival fell. This exceptional increase in savings cannot be explained by an increase of income; the average household income grew more slowly in 2008 than in 2007. Nor does decreased consumption account for deposit growth; retail sales slowed down since last fall, but large-scale consumption has not changed drastically. Loans for the housing market likewise stayed near the same level as last year, and foreign currency deposit decreased only marginally, meaning that most of the money didn’t come from exchanged foreign currencies.
So odds are that the deposit balloon was a result of the loan expansion. It is possible that companies paid back-wages to the workers once they finally got a loan, or they paid back their debt to other companies, who in turn paid back-wages. Households may also have sold their stocks for cash while the companies invested with their loans. Individual investors might have turned away from investing and saved more in their deposit account. And some companies might have sold commercial papers and placed part of the money in private accounts for interest arbitrage.
Lastly, some companies might have invested their loans in fixed assets. Considering the extraordinarily large amount of credit given in January, other sources of private funding might have been squeezed. As a matter of fact, over 90 percent of fixed investment in the first two months of each year are made by state-owned or state-held enterprises, which largely rely on bank loans to finance their investments. This means it’s possible bank loans paid for all fixed investments in January.
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Decoding the 1.6 Trillion Enigma
January’s extraordinary loan growth might have increased household savings and poured funds into the stock market.
Shen Minggao and economist He Yin, Caijing
23 February 2009
The 1.6 trillion yuan that Chinese banks lent in January comes as a shock. It is as much as one third of the loans granted in 2008.
Once the shock subsides, your next thought is, ‘Well, no wonder.’ The central bank lifted the credit cap last year, enabling banks to lend as much as they want. Add on that banks suspect profit margins for loans will narrow if the central bank continues to cut interest rates and you have the beginnings of an answer. Right now, it’s in the interests of banks to grant as many loans as they can before rates get cut again.
It is also worth noting that over 600 billion of the new “loans” were actually commercial papers. Banks seem to have raced to expand their credit business before the government tightens controls again. Thus, they bought as much commercial paper as possible, which is easier than originating loans.
But, where have the loans gone? They might go in three directions: toward deposit accounts where they sit, toward business investments, or toward equity markets where they’re used to buy stocks. It looks like the latter option may have absorbed a fair share of the new liquidity.
When companies get a loan, they can put a portion of the money in their business accounts, use a portion to raise capital and buy bonds, and keep the rest in hand for immediate uses. Deducting the amount money that went into these four outlets, there was still 830 billion yuan of the January loans that cannot be explained – that’s 500 to 600 billion more yuan compared to the previous two years. This chunk of untracked money probably found its way into the stock market, awaiting the rebound of share prices.
We found strong correlation of 0.66 between the unexplainable part of increased loans and the price hike of Shanghai stock index in the last three years.
Deposit accounts also seem to have housed a large portion of the new loans. The deposit balance rose a surprising 1.53 trillion yuan in January, 60 percent more than last February in which 2008’s Spring Festival fell. This exceptional increase in savings cannot be explained by an increase of income; the average household income grew more slowly in 2008 than in 2007. Nor does decreased consumption account for deposit growth; retail sales slowed down since last fall, but large-scale consumption has not changed drastically. Loans for the housing market likewise stayed near the same level as last year, and foreign currency deposit decreased only marginally, meaning that most of the money didn’t come from exchanged foreign currencies.
So odds are that the deposit balloon was a result of the loan expansion. It is possible that companies paid back-wages to the workers once they finally got a loan, or they paid back their debt to other companies, who in turn paid back-wages. Households may also have sold their stocks for cash while the companies invested with their loans. Individual investors might have turned away from investing and saved more in their deposit account. And some companies might have sold commercial papers and placed part of the money in private accounts for interest arbitrage.
Lastly, some companies might have invested their loans in fixed assets. Considering the extraordinarily large amount of credit given in January, other sources of private funding might have been squeezed. As a matter of fact, over 90 percent of fixed investment in the first two months of each year are made by state-owned or state-held enterprises, which largely rely on bank loans to finance their investments. This means it’s possible bank loans paid for all fixed investments in January.
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