China’s lenders have a big challenge: they can’t make enough loans

China’s commercial banks have a big problem.

Consumers and businesses are gloomy about the world’s second largest economy, credit growth has stalled. Beijing’s stimulus push has so far failed to stimulate consumer demand for credit and has yet to produce any meaningful revival in the sluggish economy.

So what do banks do with cash? Buy government bonds.

China’s sovereign bonds have seen a strong rally since December, with 10-year yields falling to all-time lows this month, according to LSEG data.

“Strong consumer and lack of business credit demand has driven capital into the sovereign bond market,” said Edmund Goh, director of fixed income investments at abrdn in Singapore.

“The biggest problem onshore is the lack of assets to invest in,” he said, adding, “There are no signs that China is going to come out of the recession right now.”

Total new yuan loans for the 11 months to November 2024 fell 20% to 17.1 trillion yuan ($2.33 trillion) from a year earlier. According to the data released by the People’s Bank of China. In November, New bank loans reached 580 billion yuancompared to 1.09 trillion yuan a year ago.

Since last September, when the economy began to miss its full-year growth target of “around 5%”, Chinese authorities have been unable to absorb credit requests despite a wide range of stimulus measures.

Goldman Sachs expects growth in the world’s second-largest economy to slow to 4.5% this year and demand for loans to fall further in December than in November.

“There is still a lack of demand for quality credit as private enterprises are cautious about approving new investments and households are also tightening their wallets,” said Lin Song, chief economist at ING.

For this year, authorities have pledged to prioritize consumption and revive credit demand through lower corporate finance and household borrowing costs.

Investors may continue to look for “risk-free sources of production” this year, Song said, adding that “some questions remain as to how strong domestic policy support will be.”

Thursday’s official data showed China’s By 2024, annual inflation has reached 0.2 percent.As prices rose, wholesale prices continued to decline, falling 2.2 percent.

Zhong Ke, portfolio manager at Shanghai-based asset manager WeQuant, said institutions are increasingly holding onto government bonds, believing economic fundamentals will remain weak.

According to Kay, the current policy interventions are only “efforts to prevent economic collapse and prevent external shocks” and “avoid a mild recession”.

U.S. 10-year Treasury yields rose at their fastest pace since June, and Wednesday’s increase sent the yield to a record high of 4.7%. The final stage was seen in April.

Investors are expecting the central bank to announce new monetary easing measures this year, such as further cuts to the key interest rate and the amount of money banks must hold as reserves. At the beginning of the year. The PBOC said it would cut key interest rates. At the “right time”.

“The bank enriches and improves monetary policy, buys and sells treasury bonds and pays attention to activities in long-term production,” he said. Statement on January 3.

But expectations of rate cuts will keep the bond rally going.

Economists at Standard Chartered Bank predict the bond rally will continue this year, but at a slower pace. The 10-year yield could drop to 1.40% by the end of 2025, they said in a note on Tuesday.

Economists say credit growth could stabilize in the middle of the year as stimulus policies begin to lift certain sectors of the economy, leading to a slower decline in bond yields.

China’s central bank said Friday. The purchase of government bonds will be temporarily suspended Due to high demand and lack of supply in the market.