Last month, we noted that demand for credit at big 4 Chinese banks remained weak while deposits fell. That has been the recurring theme for the Chinese banking system in the recent months as the economy slows and enters into a debt deflationary environment. We did stress, however, that Chinese banks are policy driven, thus lending can be directed by the government to the economy in a way that western governments or central banks would not be able to. As a result, we also have a recurring theme of banks rushing to lend towards the end of a month and quarter.
Now June has passed, and the second quarter is over. How have banks been up to?
Today, 21st Century Business Herald reports that after interest rates cut and the increased flexibility of setting deposit rates, big four banks (ICBC, Bank of China, China Construction Bank and Agricultural Bank of China) have only lent less than RMB190 billion. That is, surprisingly, even worse than RMB253 billion figure we had for big 4 banks in May. As the government has clearly started its attempt to reflate the economy since late May, this is a somewhat surprisingly weak number. On the other hand, a report from China Security Journal suggesting that instead of forcing banks to lend, some banks are being asked to stop lending, which is puzzling as that is clearly not consistent with the government’s objective of reflating the economy by speeding up approval of investment projects. Whatever the cause for the surprise lending curb is, the market would have been disappointed by the number, as most were hoping for a RMB900 billion to 1 trillion number for June new loans. Based on the number for big 4 banks, it would be extremely hard to meet the market expectation.
On the deposits side, however, the fortuned has changed in the final week or two after banks have all increased deposit rates above the benchmark. We noted that deposits have fallen by RMB272 billion in the first week of June. However, the latest report suggests that deposits at big four banks have increased by RMB1.8 trillion. We have no idea how the trend has completely reversed, and recall that despite having heard throughout the month that deposits have fallen, monetary statistics for May turned out to have increased by RMB1.22 trillion. We speculate that there could be some trusts or wealth management products maturing in the month-end, leading to increase in deposits. But that remains a pure speculation.
This article originally appeared here: Chinese banks have probably lent less than expected in June
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