China has stepped up financial assistance for its banks, lending hundreds of billions of renminbi and loosening rules on acceptable collateral in an effort to avoid a possible credit crunch for heavily indebted local governments and companies.
The People’s Bank of China injected Rmb240bn (US$36.4bn) into the banking system via its seven-day repurchase agreement programme last week, the most since market turmoil in August. Its Rmb160bn intervention on Thursday was its biggest one-day injection in years.
At the same time, the central bank has pledged to extend a relending pilot programme, widening the range of collateral that banks can pledge to the PBoC in a move that could provide as much as Rmb50bn in additional liquidity over the coming months.
The increase in financial assistance – considered by many as a form of quantitative easing – comes amid concerns about the continued flow of credit to local governments and companies as capital floods out of the country, and as appetite for bonds weakens.
“Banks and bond markets are currently in no position to keep providing finance,” said Andrew Polk, senior economist at The Conference Board in Beijing. “After concluding that traditional monetary easing steps such as interest rate cuts have not worked, the PBoC is now leveraging its own balance sheet to ensure that credit keeps on flowing.”
The central bank’s actions are likely to add fuel to the already explosive increase in China’s banking system. Chinese banks are growing at around twice the pace of the country’s economic expansion. The industry has doubled over the last five years, and at Rmb193trn, its total asset holdings equate to three times GDP.
But with exports falling and investment spending growing at its lowest rate since the turn of the millennium, analysts say Beijing is keen to push banks – which are still majority owned by the state – to lend more in an attempt to hit the 6.5% increase in GDP that the country’s leaders have targeted and prevent a deeper economic and financial collapse.
“We do see upside risk in loan growth, not because the economy is recovering and demand is picking up, but rather the opposite,” said Patricia Cheng, head of China financials at CLSA. “We need more credit to achieve the GDP target, given less capital efficiency. Credit support from banks is essential [to meet the GDP target].”
Buying time
“The authorities are trying to buy time, ensuring banks continue to lend so that borrowers don’t come under unnecessary pressure,” said Christopher Balding, economics professor at Peking University. “They are encouraging banks to continue pumping up credit.”
Support from banks is unlikely to be limited to direct loans, which account for about half of all credit to the Chinese economy. Bankers and analysts say they expect to increasingly see banks as active buyers in bond markets to support prices and bring down spreads. Bond markets have grown rapidly over recent years to now provide almost a third of credit.
Chinese banks are frequently seen buying bonds issued by local governments and companies in China both in the domestic and offshore markets, but bankers say their presence has increased lately. Asian banks bought over a third of Ping An Life Insurance’s US$1.2bn bond on Tuesday, and bankers said the majority of orders came from lenders in China.
“There is a lot of rhetoric about liberalisation and free markets, but the fact of the matter is that state intervention is alive and well,” said Polk. “The Chinese are experts in introducing new distortions to address previous distortions – in this case the build up of corporate and government debt. But it is necessary to avoid a deeper slowdown.”
Dodgy loans
But propping up credit supply risks saddling banks with problems. Chinese banks have already seen non-performing loans double over the past two years to Rmb1.2trn, although many analysts believe the real figure is multiple times higher.
Of particular concern is legacy lending to industries that are facing major overcapacity issues, such as mining and shipbuilding. Deutsche Bank estimates that banks have extended about Rmb4.6trn – equivalent to about 5% of their loan books – to those industries, and has raised concerns that little has been done about problem loans to such sectors.
There are expectations that banks could be allowed to securitise NPLs this year – as happened a decade ago – to free up balance sheet. Four NPL-backed securitisations were sold before the global financial crisis in a trial that raised Rmb13.4bn, before being suspended as the crisis spread.
Still, some worry that any additional liquidity will only find its back way to these same companies, helping avoid defaults that could trigger contagion in bond and equity markets and spare political embarrassment.
“Credit is being channelled to help financially impaired borrowers,” said George Magnus, an associate at Oxford University’s China Centre. “If the government is relying on even more credit to support an unsustainably high growth rate, then the future looks worrying. We are going to see a combination of growing financial stress and capital misallocation.”
