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China’s new bank lending took a dip in April to its lowest in nearly four and a half years as Covid-19 lockdowns weigh on the economy and weakened credit demand, the country’s Central Bank said. New reports now suggest that Chinese authorities are struggling to convince companies and individuals to boost loan growth, through rate cuts and additional benefits.
Banks in China are facing a dearth of new loan applications as China’s zero-Covid policy and frequent lockdowns have crippled economic activity in industrial hub Shanghai for weeks. Businesses are troubling to stay afloat as manufacturing has slumped and revenues have plunged. Additionally, a slump in the property sector has caused sluggish demand for loans.
“The main reason for such small credit growth is because of Covid lockdowns that have created difficulties for getting new loans. During lockdowns, there are many individuals and companies who suffer from loss of wages and loss of business, so therefore there should be an increase in demand for loans,” said ING in a note.
Covid curbs, falling profits and shrinking wages
China’s April loan growth was less than 20% of that seen in March. Now, banks are swapping bills with each other to meet regulatory requirements for corporate lending. Covid curbs across China have led to job cuts and wages are falling.
“Lending was much weaker than expected last month as lockdowns weighed on credit demand. This should nudge the PBOC to announce further easing measures soon. But the central bank continues to signal a relatively restrained approach,” said Julian Evans-Pritchard, senior China economist at Capital Economics, on May 13.
The commentary from the Capital Economics economist was followed by the PBOC announcing a cut to the five-year loan prime rate to 4.45% from 4.6% previously.
China’s banks themselves are facing weak profits growth after the poor loan demand hit results in the first quarter. However, the banks are brimming with cash and the repurchase cost – the key measure for interbank borrowing costs – has stayed below 2% for over two months.
The sharp slowdown in loan growth reflects the impact of Covid-19 on the real economy. However, the Chinese authorities have taken note of the slowing economic activity and weakened corporate expansion and are urging banks to lend more. Last week, PBOC said it will promote credit for smaller firms and boost confidence of banks and other lenders to lend more money. The central banks sent a notice to national banks asking them to prioritise lending to central and western regions, and areas badly affected by Covid-19.
“Fault tolerance and risk mitigation systems should be improved to boost the confidence to lend,” the PBOC told banks in its notice.
Small and medium enterprises are the biggest employers in China and the country’s economy largely depends on these companies. However, they were the worst hit as stringent lockdowns hit supply chains.
“Demand for credit, already hurt by the lingering Covid-19 lockdowns, will likely remain weak in the second and third quarter,” said Eric Wang, Shanghai-based banking analyst at CMB International Capital Corp. Ltd, told S&P Global.
