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New Loan Growth Declines Further In February

03-13 15:09 Caijing
Feeble growth in bank deposits and a loan-to-deposit ratio cap of 75 percent restricted banks' lending capacity.

By staff reporters Diao Xiaoqiong and Dong Yuxiao

New bank loans made by China’s big four state-owned banks (the Big Four) reached just over 200 billion yuan in February. A source at the loan department of a major state-owned bank told Caijing that banks loans made by the Big Four typically account for 40 to 45 percent of total banks loans outstanding. Based on this metric, total new bank loans in February would be less than 600 billion yuan.

The above view is somewhat pessimistic compared with recent estimates by other agencies. Still, the banking industry widely expects that new bank loans in February will fall from the level of 738.1 billion yuan in January.

Loan-to-deposit Ratio Cap Constrains Loans 

A source close to regulatory agencies attributed the phenomenon to the possibility that banks inflated their loans at the end of 2011, from which more deposits can be derived. Therefore, the number dropped when the true level was revealed in the first quarter of 2012.

Feeble growth in bank deposits in the beginning of 2012 and a loan-to-deposit ratio cap of 75 percent restricted banks’ lending capacity. The ratio cap is more “lethal” to joint-stock banks. Caijing learned that one joint-stock bank has exceeded the cap for two consecutive months. Last year, when asked by the central bank why it did not lend, another joint-stock bank replied that it had exceeded the cap.

Bank deposits have dropped dramatically in the last few years due to a number of factors. First, China’s Consumer Price Index (CPI) reading is higher than the one-year deposit rate. Next, along with the development of the domestic capital market, people can now choose to invest their money in stocks, bonds, financial products, equity funds and the private lending sector, rather than depositing it in the bank. Ma Weihua, president of China Merchants Bank, stated that bank deposits grew by a mere 11.9 percent last year, which is eight to nine percentage points below the average rate in the last decade. Banks are still under intense pressure to absorb deposits this year.

Hu Yifan, chief economist at Haitong International Holdings Limited, told Caijing that the first two months of 2012 have been somewhat of an anomaly. The sluggish real estate market in 2011 spurred increases in the non-performing assets ratios of many regional banks and local branches of state-owned banks. The banks were recovering rather than making loans in January, said Hu.

Tightening monetary policy in July 2011 also contributed to banks’ slow loan growth. Statistics from the central bank indicate that the month-on-month M2 growth rate dropped to a single digit from July to October last year, highlighting the force of the country’s tightening measures. Since the policy operates with a lag, slow growth in new loans didn’t show up until the first two months of 2012.

Although the central bank cut the deposit reserve ratio by half a percentage point in February, only a moderate amount of money has been released thus far.

Weak Demand in the Real Economy

However, the bill discount rate which is supposed to rise when money supply is tight fell instead. Statistics from ChinaCP show that the rate started to decline from 13 percent last October and fell to about 7 percent in Jan. 2012, before dropping to 6.5 percent in early February.

“This is indicative of weak demand in the real economy and enterprises’ reluctance to take out new loans,” said E Yongjian, senior researcher at Bank of Communications. External demand is weak, corporate profitability is expected to decline, real estate development loans and financing platform loans have been restricted, and home sales are sluggish; all these factors have led to an overall shortfall in the demand for credit.

"In fact, the whole industry is cutting back on issuing new bank loans,” said the source at the loan department of a major state-owned bank. The source added that the current decline in credit growth is mainly due to relatively weak demand in the real economy.
   
The global economy has further slowed since the spread of the European debt crisis. The euro zone may experience negative economic growth, while economic growth in emerging economies continues to decline. The weakness in global market demand has caused a foreign trade slump and a further decline in external demand while domestic demand also remains sluggish.

"The real estate industry is expecting home prices to decline. This factor and a crackdown on local financing platforms have led to a shortfall in overall demand,” said the source.

Moreover, few enterprises can meet the banks’ loan standards, adding pressure to the banks’ profit-making efforts. A source at the Tianjin branch of a major state-owned bank stated that “We are still interested in big companies such as China National Petroleum Corporation (CNPC) and China Petrochemical Corporation (Sinopec). But we are not as enthusiastic as we used to be, because these companies often start a negotiation by asking us to lower their lending rates.”

No Sharp Rise in March

Assuming M2 grows by 14 percent, the target for new bank loans in the first quarter is about 2.5 trillion yuan. Industry insiders estimated that given the trend in the first two months, it will be difficult to achieve the kind of growth seen in the past, even though credit growth may pick up in March.

“Credit growth may drop even lower in March,” stated an executive in charge of the corporate finance department at a major state-owned bank. “Banks are now required to balance lending in each quarter, so they can’t extend credit even if they want to.”

Nonetheless, a source at the department of assets and liabilities of the Agricultural Bank of China stated, “This year, banks will issue loans at a more even pace, unlike previous years when most of the loans were made in the beginning of a year. It will not be difficult for total bank loans in 2012 to reach 8 trillion yuan, though credit growth slowed down in the beginning of this year.” 

In addition, enterprises expect the central bank to raise interest rates or further cut the deposit reserve ratio after trimming it in mid-February. A source at the credit department of a major state-owned bank said, “Many clients arranged to borrow money in the first two months, but never showed up to take out the loans.” As many factories resume operations in March, the clients that never showed up may return to take out loans. Some industry insiders estimate a small credit peak in March.

Staff reporter You Xi contributed to this article.

1 yuan = 15 U.S. cents

Full story in Chinese: http://magazine.caijing.com.cn/2012-03-11/111736266.html

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