According to People’s Bank of China (PBoC) statistics revealed yesterday, in January RMB loans grew 1.62 trillion yuan, almost twice of the growth in January, 2008. Lending in December and January equalled almost a half of the lending in all of 2008.
Short-term credit, including bill financing, accounted for more than 3/5 of the total. But enterprises’ deposits, a major source credit funds, increased by less than 76 billion yuan, leaving a question mark as to continuing credit growth in the future.
Structure mismatching
“Most of the loans have been issued to projects involved in the government’s 4 trillion yuan stimulus plan. Banks are all willing to lend money to these projects,” said commercial bank’s credit manager. He estimated credit growth in the first few months of this year would be quite fast, “faster than any previous year”.
Lending to non-financial companies and other sectors accounted for over 90% of the new lending in January, while lending to consumers increased by only 121.4 billion yuan.
In January, RMB deposits grew 1.51 trillion yuan, 1.28 trillion higher than the growth in January, 2008. Among the total, private deposits increased by 1.53 trillion yuan, while deposits from non-financial companies and other sectors dropped 91.9 billion yuan, and fiscal deposits increased 48.8 billion yuan. This is a complete mismatch from the loan structure.
Although PBoC explained that among non-financial companies and other sectors, enterprises’ deposits grew 75.9 billion yuan, 258.6 billion yuan higher than the deposit growth in the same month last year (in which deposits dropped by 182.7 billion yuan), this increase is certainly much lower than the loan increase in the same month.
According to the explanation of Lu Zhengwei, chief economist of the fund operation department of the Industrial Bank of China, generally speaking enterprises’ borrowing not only directly forms deposits, but also produces deposits several times the lending. However, in January enterprises’ deposits grew only about 76 billion yuan over the previous month, while in the past the monthly growth was usually about 100 billion yuan. “This may indicate many existing loans off balance sheet have been transformed into new lending this year.”
Morgan Stanley chief China economist Wang Qing also commented that after lines of credit were cancelled, banks had probably included loans out of book into the total lending, leading to high credit growth, meaning in the following months credit growth will fall back to normal levels.
Arbitrage by note financing?
In January, bill financing alone reached 623.9 billion yuan, accounting for 39% of the new lending. Bill financing has risen quickly since last year’s fourth quarter. Almost 500 billion yuan of last years 646.1 billion yuan total came in the fourth quarter alone.
Ruan Hongjian, vice director of PBoC’s survey and statistics department, said at the beginning of February that low interest rates were a main reason for the great note financing growth. With the new high degree of marketization, interest rates for note financing are mainly decided by supply and demand in the market. The scale of note financing decreases when interest rates increase.
Interest rates for note financing have fallen from over 20% in the first half of 2008 to about 2%. Sun Mingchun, chief Asia economist at Nomura, is quite optimistic, believing the steep decrease of interest rates for note financing will greatly reduce firm’s financing costs, especially for small and medium enterprises, and help to improve profit-making ability this year.
Some analysts, however, including Lu Zhengwei, think companies will make money by transferring funds gained from note financing to time deposits with a higher interest rate.
But Lu Zhengwei also believes a considerable amount of notes are from enterprises conducting projects brought by the government’s expansion policy. This shows the expansion policy is working, but also indicates that banks are still trying to avoid risks when lending money.
High credit growth unsustainable
Many analysts predict that such high credit growth is not sustainable and will probably decline in the second half of the year. Current growth is now led by local government infrastructure construction projects. When these projects get the money they need, lending will fall back.
“Real demand for firms is declining. Without orders, will they still need loans? The current credit growth is completely led by the government’s stimulation policy,” a commercial bank insider said.
Wang Qing believes in the future credit growth will be restrained by many factors: banks’ capital adequacy ratio, which will affect banks’ ability to lend, and a worsening external environment, which will make some industries, especially in manufacturing, unwilling to invest. “Loan growth is estimated to fall back to about 15% later this year, but will still support the government’s stimulation projects. But more reasonable lending will relieve banks’ concerns over bad loans.”
Lu Zhengwei thinks due to banks’ enthusiasm to lend to government projects at the beginning of the year, which led to higher credit growth than expected in January, a transitional point for credit may come earlier. He predicts it may emerge as soon as February.
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January Credit Explosion Unsustainable
CSC staff, Shanghai
14 February 2009
According to People’s Bank of China (PBoC) statistics revealed yesterday, in January RMB loans grew 1.62 trillion yuan, almost twice of the growth in January, 2008. Lending in December and January equalled almost a half of the lending in all of 2008.
Short-term credit, including bill financing, accounted for more than 3/5 of the total. But enterprises’ deposits, a major source credit funds, increased by less than 76 billion yuan, leaving a question mark as to continuing credit growth in the future.
Structure mismatching
“Most of the loans have been issued to projects involved in the government’s 4 trillion yuan stimulus plan. Banks are all willing to lend money to these projects,” said commercial bank’s credit manager. He estimated credit growth in the first few months of this year would be quite fast, “faster than any previous year”.
Lending to non-financial companies and other sectors accounted for over 90% of the new lending in January, while lending to consumers increased by only 121.4 billion yuan.
In January, RMB deposits grew 1.51 trillion yuan, 1.28 trillion higher than the growth in January, 2008. Among the total, private deposits increased by 1.53 trillion yuan, while deposits from non-financial companies and other sectors dropped 91.9 billion yuan, and fiscal deposits increased 48.8 billion yuan. This is a complete mismatch from the loan structure.
Although PBoC explained that among non-financial companies and other sectors, enterprises’ deposits grew 75.9 billion yuan, 258.6 billion yuan higher than the deposit growth in the same month last year (in which deposits dropped by 182.7 billion yuan), this increase is certainly much lower than the loan increase in the same month.
According to the explanation of Lu Zhengwei, chief economist of the fund operation department of the Industrial Bank of China, generally speaking enterprises’ borrowing not only directly forms deposits, but also produces deposits several times the lending. However, in January enterprises’ deposits grew only about 76 billion yuan over the previous month, while in the past the monthly growth was usually about 100 billion yuan. “This may indicate many existing loans off balance sheet have been transformed into new lending this year.”
Morgan Stanley chief China economist Wang Qing also commented that after lines of credit were cancelled, banks had probably included loans out of book into the total lending, leading to high credit growth, meaning in the following months credit growth will fall back to normal levels.
Arbitrage by note financing?
In January, bill financing alone reached 623.9 billion yuan, accounting for 39% of the new lending. Bill financing has risen quickly since last year’s fourth quarter. Almost 500 billion yuan of last years 646.1 billion yuan total came in the fourth quarter alone.
Ruan Hongjian, vice director of PBoC’s survey and statistics department, said at the beginning of February that low interest rates were a main reason for the great note financing growth. With the new high degree of marketization, interest rates for note financing are mainly decided by supply and demand in the market. The scale of note financing decreases when interest rates increase.
Interest rates for note financing have fallen from over 20% in the first half of 2008 to about 2%. Sun Mingchun, chief Asia economist at Nomura, is quite optimistic, believing the steep decrease of interest rates for note financing will greatly reduce firm’s financing costs, especially for small and medium enterprises, and help to improve profit-making ability this year.
Some analysts, however, including Lu Zhengwei, think companies will make money by transferring funds gained from note financing to time deposits with a higher interest rate.
But Lu Zhengwei also believes a considerable amount of notes are from enterprises conducting projects brought by the government’s expansion policy. This shows the expansion policy is working, but also indicates that banks are still trying to avoid risks when lending money.
High credit growth unsustainable
Many analysts predict that such high credit growth is not sustainable and will probably decline in the second half of the year. Current growth is now led by local government infrastructure construction projects. When these projects get the money they need, lending will fall back.
“Real demand for firms is declining. Without orders, will they still need loans? The current credit growth is completely led by the government’s stimulation policy,” a commercial bank insider said.
Wang Qing believes in the future credit growth will be restrained by many factors: banks’ capital adequacy ratio, which will affect banks’ ability to lend, and a worsening external environment, which will make some industries, especially in manufacturing, unwilling to invest. “Loan growth is estimated to fall back to about 15% later this year, but will still support the government’s stimulation projects. But more reasonable lending will relieve banks’ concerns over bad loans.”
Lu Zhengwei thinks due to banks’ enthusiasm to lend to government projects at the beginning of the year, which led to higher credit growth than expected in January, a transitional point for credit may come earlier. He predicts it may emerge as soon as February.
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