China’s new bank lending went up slightly in August, according to a recent Reuters survey. However, outstanding loan growth remained on the lower side, which raised pressure on policymakers to avail plenty of liquidity in the face of an ongoing trade war.
The situation was evidenced in the People’s Bank of China (PBoC), which on September 6 reduced its reserve requirements for the seventh time since 2018. This approach is aimed at freeing up more funds for lending and comes just days after a cabinet meeting that signaled more policy loosening.
The move is also a sign that Beijing is worried about the inferior economic situation prompted by increasing U.S. tariffs and a slow domestic demand. From the beginning of September, Washington enforced new tariffs, with threats of more measures on October 1 and December 15, 2019.
Loan Figures Outlook and the Ailing Economy
In August 2019, Chinese banks released 1.2 trillion Yuan ($168.4 billion) in net new loans. This was a slight increase compared to July’s 1.06 trillion Yuan. However, the new figure remained slightly below the count of 1.28 trillion Yuan at the same time last year. The survey was conducted by a Reuters team comprising 27 economists.
According to PBoC, the latest move to reduce the banks’ RRR (reserve requirement ratio) would pump 900 billion Yuan in liquidity to support the ailing economy.
On the other hand, some analysts have warned that the huge injection of liquidity might not help the real economy, given that business activity in the manufacturing, investment, and retail sectors is already suffering from the prolonged Sino-U.S. trade war. According to ING Greater China Economist Iris Pang,
“The RRR cut’s main impact will be to lower interest costs of small firms, as they are more likely to use the cash to repay existing loans than to spend on new production activities.”
Last month, PBoC also launched an important interest rate reform by improving the system used to create the Loan Prime Rate (LPR)—all meant to further decrease actual interest rates for companies.
Lower lending rates, lower profit margins
The government’s move to persuade banks to lower lending rates did not augur well with the banks as it imposed pressure on their profit margins. According to five top-listed banks in the country, the banks were facing pressure on earnings and asset quality owing to the uncertainty caused by interest rate reform and trade war.
Last Wednesday, China’s cabinet announced it would allow local governments to release special-purpose bonds earlier than their normal issuance time next year to promote steady growth. Besides, for the first time, the cabinet announced that 20% of all the special purpose bonds from each province would serve as project capital.
More Mitigation measures
The country is expected to reveal more support measures. In the coming weeks, it might impose mild cuts on several lending rates and more RRR cuts perhaps in the fourth quarter of the year.
Last Monday, PBoC surprised the market when it did not roll over the medium-term lending facility (MLF) loans, which was a sign that it did not want to flood the banking system with cash, after the reduction in their required reserves.
