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Thursday, 14 June 2012
China’s banks in no position to launch fresh lending stimulus
2012 is not 2009, and a below-the-surface shift in the
financial landscape means the way the country responded to the last crisis
cannot be repeated this time
China’s banks in no position to launch fresh lending stimulus
2012 is not 2009, and a below-the-surface shift in the financial landscape means the way the country responded to the last crisis cannot be repeated this time
Tom Holland 14 June 2012
Investors worried about a slowdown in the Chinese economy have taken heart this week from figures showing a rise in bank lending last month.
Coming on top of last week’s quarter point cut in benchmark lending rates, the increase in new bank loans to 793 billion yuan (HK$971.4 billion) in May from 682 billion yuan in April has convinced many observers that Beijing is once again opening the credit taps to avert a painful cyclical downturn.
But this is 2012, not 2009, and a below-the-surface shift in China’s financial landscape means the country’s banks are in no position now to boost lending as they did back then in response to the financial crisis.
In 2009, China’s banks were flush with liquidity. With the stock market moribund, savers had nowhere else to put their money, so the banks enjoyed plentiful funding from a fast-growing base of captive deposits on which they paid rock-bottom interest rates.
With such a secure source of cheap funds, banks were able to jack up their lending without worrying about the consequences. The result was an unprecedented credit boom that saw outstanding bank loans shoot up by an astonishing 60 per cent in just two years.
Things are different now. Over the last couple of years the market has developed a whole new range of higher-yield alternatives for individuals and companies fed up with earning a negative real return on their bank deposits.
Households have switched from deposits to so-called “wealth management products”, or structured notes backed by portfolios of high-yielding assets.
In the first quarter of this year, for example, the typical wealth management product with a 90-day maturity offered a yield of 5.2 per cent, considerably more than the meagre 3.1 per cent interest rate paid by a three-month fixed deposit.
Meanwhile cashed-up corporations have set up their own financing arms to lend at high interest rates directly to credit-starved companies. And both households and corporations have moved money offshore.
In response, the growth of household deposits has slowed, and corporate deposit growth has dried up altogether.
As a result, the mainland’s banks are in an unaccustomed funding squeeze. From 4 per cent of total assets in 2008, excess deposits collapsed to zero last year.
That’s created a problem. In the past, mainland bankers never had to worry about paying out depositors, because savers had nowhere else to go. That meant they never bothered much about whether borrowers would be able to repay their loans. After all, they had more than enough new deposits flowing in to cover all their liquidity needs.
Now, with savers busy switching accounts in search of better returns, for the first time ever banks are actually having to meet their liabilities to depositors.
And to pay them out, all of a sudden bankers are finding that they actually need to collect on the loans they’ve made, rather than simply rolling them over indefinitely when borrowers run into problems.
According to Charlene Chu at Fitch Ratings in Beijing, the big five state-owned banks may face negative cash flow this year unless they begin collecting loan repayments.
The country’s smaller banks are even worse off. Chu says they will need to collect 60 per cent of their loans maturing this year in full and on time if they are to break even in cash flow terms.
This fundamental change in the banking environment will have two major effects, warns Chu. Firstly, attempts to collect on loans will expose the delinquency of many borrowers whose poor credit quality was previously disguised by plentiful liquidity.
Secondly, the resulting cash shortage will restrict the banking sector’s ability to make new loans.
That means the banks are in no position to embark on even a scaled-down version of their 2009 lending binge.
If Beijing now orders the banks to support favoured projects and companies with fresh loans, it will simply increase the amount of deadweight on bank balance sheets, and further limit their capacity to extend credit to productive sectors of the economy.
That would just exacerbate the problem, weakening the banking sector and damaging China’s longer-term growth prospects.
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China’s banks in no position to launch fresh lending stimulus
2012 is not 2009, and a below-the-surface shift in the financial landscape means the way the country responded to the last crisis cannot be repeated this time
Tom Holland
14 June 2012
Investors worried about a slowdown in the Chinese economy have taken heart this week from figures showing a rise in bank lending last month.
Coming on top of last week’s quarter point cut in benchmark lending rates, the increase in new bank loans to 793 billion yuan (HK$971.4 billion) in May from 682 billion yuan in April has convinced many observers that Beijing is once again opening the credit taps to avert a painful cyclical downturn.
But this is 2012, not 2009, and a below-the-surface shift in China’s financial landscape means the country’s banks are in no position now to boost lending as they did back then in response to the financial crisis.
In 2009, China’s banks were flush with liquidity. With the stock market moribund, savers had nowhere else to put their money, so the banks enjoyed plentiful funding from a fast-growing base of captive deposits on which they paid rock-bottom interest rates.
With such a secure source of cheap funds, banks were able to jack up their lending without worrying about the consequences. The result was an unprecedented credit boom that saw outstanding bank loans shoot up by an astonishing 60 per cent in just two years.
Things are different now. Over the last couple of years the market has developed a whole new range of higher-yield alternatives for individuals and companies fed up with earning a negative real return on their bank deposits.
Households have switched from deposits to so-called “wealth management products”, or structured notes backed by portfolios of high-yielding assets.
In the first quarter of this year, for example, the typical wealth management product with a 90-day maturity offered a yield of 5.2 per cent, considerably more than the meagre 3.1 per cent interest rate paid by a three-month fixed deposit.
Meanwhile cashed-up corporations have set up their own financing arms to lend at high interest rates directly to credit-starved companies. And both households and corporations have moved money offshore.
In response, the growth of household deposits has slowed, and corporate deposit growth has dried up altogether.
As a result, the mainland’s banks are in an unaccustomed funding squeeze. From 4 per cent of total assets in 2008, excess deposits collapsed to zero last year.
That’s created a problem. In the past, mainland bankers never had to worry about paying out depositors, because savers had nowhere else to go. That meant they never bothered much about whether borrowers would be able to repay their loans. After all, they had more than enough new deposits flowing in to cover all their liquidity needs.
Now, with savers busy switching accounts in search of better returns, for the first time ever banks are actually having to meet their liabilities to depositors.
And to pay them out, all of a sudden bankers are finding that they actually need to collect on the loans they’ve made, rather than simply rolling them over indefinitely when borrowers run into problems.
According to Charlene Chu at Fitch Ratings in Beijing, the big five state-owned banks may face negative cash flow this year unless they begin collecting loan repayments.
The country’s smaller banks are even worse off. Chu says they will need to collect 60 per cent of their loans maturing this year in full and on time if they are to break even in cash flow terms.
This fundamental change in the banking environment will have two major effects, warns Chu. Firstly, attempts to collect on loans will expose the delinquency of many borrowers whose poor credit quality was previously disguised by plentiful liquidity.
Secondly, the resulting cash shortage will restrict the banking sector’s ability to make new loans.
That means the banks are in no position to embark on even a scaled-down version of their 2009 lending binge.
If Beijing now orders the banks to support favoured projects and companies with fresh loans, it will simply increase the amount of deadweight on bank balance sheets, and further limit their capacity to extend credit to productive sectors of the economy.
That would just exacerbate the problem, weakening the banking sector and damaging China’s longer-term growth prospects.
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