Relaxed monetary policies impart little boost on new lending in China

Banks remain cautious over credit quality–and further cuts will do little to change their minds.

Relaxing monetary policies gave a little boost to new lending in China, with banks remaining cautious as they remain concerned regarding credit quality–and further cuts may not be enough to alleviate concerns, according to a report by the financial institution, ING.
 
New bank lending in China fell “more than expected” in December 2021, with aggregate finance dropping to CNY2.37t from CNY2.61t in November of the same year, according to the report. New yuan loans also fell to CNY1.13t from CNY1.27t in November. 

The fall happened despite the central bank cutting reserve requirement ratios (RRR) by 0.5 percentage points and interest rates by 5 basis points around the same period.

The small growth in credits shows that despite cuts to RRR and interest rates, banks are reluctant to lend as their concern is more about credit quality, according to ING’s Iris Pang, chief economist, Greater China.

“This is because several big corporations have recently defaulted. Though the default entities are mostly real estate developers, the risk is increasing to the suppliers, mostly in the industry of construction materials,” Pang said. 

Demand for loans is mostly affected by real estate.

If loans continue to experience a monthly decrease, Pang notes that the government may need to send out “a clearer message” to banks.

“If risk awareness is on the top of the list of banks' concerns, then further RRR and interest rate cuts may not yield a result of more credits. That means that even a loosening monetary policy may not boost economic activity,” Pang said.

“We may also see a return to the old days when banks lent to state-owned enterprises (SOEs), which are supposed to be better in terms of repayment ability.