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China Promotes Bank Lending as it Worries about Shadow Credit

Posted by Joseph Trevisani on Jul 19, 2013 11:31:00 AM


ScreenHunter 1453 Jul. 19 13.58

China will eliminate the lower limit on bank lending rates as her economic growth slows to levels not seen since the financial crash.

Effective tomorrow  banks may lend  at rates of their choosing, removing the lower limit set at 30 percent of the current 6 percent lending reference, in place since last July, according to the People's Bank of China (PBOC) in Beijing.  The cap on deposit rates was left in place.

Chinese economic growth has averaged 7.6 percent a year over the past six months for the weakest half –year performance since the nation grew 6.6 percent in the last quarter of 2008 and the first quarter of 2009. 

The accuracy of the official 7.5 percent second quarter GDP rate is doubted by many economists, with most positing a real rate below 7.0 percent.

If China’s economy maintains its current growth rate in the second half, it would be the slowest year for the country since GDP increased 7.45 percent in 2001 and 7.1 percent in 1999.

Although the economy had dipped to 6.2 percent in the first three months of 2009, by the final quarter of that year it had rebounded to 10.7 percent as the government unleashed a massive credit based financial stimulus primarily in the form of business loans.

Chinese  economic authorities and new Premier Li Keqiang are in a quandary as they try to control  loans from the so-called 'shadow banking system' which have fueled speculation in real-estate and overdevelopment in manufacturing industries at the same time as they maintain enough economic growth to avoid unemployment its potential for social unrest.

In late June the PBOC engineered a cash shortage in the overnight lending market as the bank withheld funds and the one day borrowing rate jumped to a record 12.85 percent on June 20th.   Many took this as a deliberate warning to lenders not to source longer term loans in the short term market and an effort to limit the record expansion in Chinas credit.

The PBOC chose not to increase or remove the ceiling on deposits which would have reduced the attraction of non-financial investments by providing depositors with better returns.   One of the factors driving investors to the non-financial sector are the poor returns of investments in the traditional banking institutions.

New Yuan loans averaged 917.64 billion a month in the first quarter of this year.  Though the average had dropped to 773.60 billion per month in the second quarter, January, February and March saw the biggest expansion in credit since 1,526.48 billion a month in new loans were expended in the first quarter of 2009 as the Beijing authorities flooded the country with stimulus funding to prevent collapse in the wake of the global financial crash that fall.

New Yuan LoansBloomberg

The central bank said that the move in the lending limit will reduce firms’ borrowing expenses and improve financial institutions' pricing capabilities.  It will also enable banks and other  institutions to compete more effectively with the loans from non-financial organizations, the largely unregulated and  poorly monitored 'shadow banking system' which has funded many development projects.

The government did say in March that it would “roll out new measures in promoting interest-rate and exchange-rate liberalization as well as in developing a multilevel capital market." Most observers thought this would involve removing both the floor on lending rates and the cap on deposit rates.

Joseph Trevisani

Chief Market Strategist




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