China’s weak loan growth is due to sluggish policy


(MENAFN – ING) Loan growth was still weak in August, which is not associated with historical seasonality. Political repression has hit businesses. 14th five-year plan could help companies revamp their business plans

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Author Iris Pang Newsletter

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Overall yuan loan growth was CNY 1.22 trillion in August, a very slight rebound from July’s 1.08 trillion, and July was a month when the loan amount was lower than in June. In addition, the rebound in August was weaker than that observed during the same month of 2020 and 2019. In short, loan demand has been weaker than in 2020 since July.

And this weakness concerns the corporate sector, not households.

Tightening policy could be a factor in weak demand for loans

There could be two reasons for this low demand for loans. The first is that companies don’t need cash, perhaps because they don’t have investments or an operational need for loans. Another is that the banks don’t lend to them.

Both appear to be true based on August data.

There has been an increase in business savings, which shows that some businesses do not need to take loans because they have more cash than a month ago.

Other companies are having to resort to entrusted loans, which increased in August. This shadow banking business has not seen growth since 2018. The only exception was in January 2020 which saw an increase of CNY 9.1 billion. In August, this increased by CNY 17.7 billion, an increase of CNY 59.2 billion year-on-year. Entrusted loans are used when banks are unwilling to take credit risks. Banks combine two companies, one as a lender, the other as a borrower. When the loans entrusted increase, it means that the banks are unwilling to accept the loan.

We believe that some companies are in a difficult situation and are suffering from the political tightening, which means 1) they do not want to invest at the moment and are reconsidering their business plans; 2) some need money due to sudden policy tightening, but banks are unwilling to take credit risk, resulting in increased loans entrusted.

The 14th five-year plan is the roadmap for business investment

Businesses don’t like uncertainty. A clear roadmap is therefore better for business investment and economic growth.

We believe the government will stick to its 14th five-year plan as a roadmap for economic growth, and companies may need to link their business plans to it. This setback in investment sentiment should then subside.

One suggestion we made in November 2020 was that China increase its investment in green policies.

So we wrote a note on the amount of investment from China needed for zero carbon transport sector, which is here, and this is the full report for China, Japan, South Korea, together .

We maintain our forecast of 8.9% GDP growth forecast for 2021.

Key words
Green GDP reform loans China’s share

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