An Unexpected Problem Emerges: Chinese Banks Exhaust 80% Of Loan Quotas In First Half Of 2017

When we discussed the latest monthly Chinese credit data reported by the PBOC, we pointed out something which to most pundits was broadly seen as success by the Politburo in its deleveraging efforts: for the first time in 9 months, debt within China's shadow banking system - defined as the sum of Trust Loans, Entrusted Loans and Undiscounted Bank Loans - contracted. These three key components combined, resulted in a 64BN yuan drain in credit from China's economy, the first negative print since October 2016, and rightfully seen by analysts as evidence that Beijing’s campaign to contain shadow banking and quash risks to the financial system, is starting to bear fruit.


Offsetting this unexpected decline in shadow bank credit (if not Total Social Financing) was a greater than expected increase in traditional yuan bank loans. As we observed last Tuesday, both corporate loans and household loans increased greater than last year; new corporate loans advanced to CNY354bn from a decline of CNY3bn a year ago, with long-term corporate loans contributing CNY433bn (a year ago: CNY151bn) and short-term loans adding CNY63bn (a year ago: CNY-201bn). New household loans registered CNY562bn, compared with CNY458bn a year ago.


So far, so good: after all a transition from the largely unregulated, and speculative shadow bank issuance to conventional bank issuance is just what the PBOC, China's regulators and most importantly, Xi Jinping want ahead of this year's all important Congress. Furthermore, the fact that China's economy continues to grow at a healthy pace, even if it means creating the occasional industrial metals bubble...


.... thanks to healthy bank loan creation, is good for both China and the rest of the world, and suggests that despite the sharp drop in China's credit impulse, there is more where it came from.


There is just one problem: there very well may not be much where it came from. In fact, according to analysts, there may be almost nothing left.

Reuters reports that following 7 months of blistering credit creation in terms of both new Loans and Total Social Financing, Chinese banks are set to see a slowdown in lending growth in the second half of the year, having exhausted most of their annual credit quota, in the process raising the spectre of corporate defaults as financing costs climb further in the world’s second-largest economy. The math is disturbing: only six months into 2017, banks have already used 80% of their yearly credit quota over January to June, versus the usual 60%, amid the abovementioned regulatory push to bring shadow financing activities to the main loan book, and Beijing’s crackdown on riskier lending.

While "loan demand is strong throughout the whole year”, as the second chart from the top shows, “the core conflict in the second half is loan quota – whether banks will be able to extend more loans than they originally planned" said Ma Kunpeng, chief financial industry analyst at China Merchants Securities, quoted by Reuters.

While it remains to be seen if Beijing will allow banks to breach their quotas, a sharp slowdown in new loan issuance is expected in either case: as reported last week, China saw a 12.9% growth in outstanding yuan loans as of the end of June. Nomura China economist Wendy Chen expects this to slow to 12.6% in Q3 and to 12.4% in Q4, more than 1% decline from 13.5% in 2016: a substantial hit to China's overly credit-reliant economy.

Adverse impact on the economy aside, the sharp contraction in bank loans in Q3 and Q4 means that “corporate defaults will rise if the availability of finance is further restricted. This could become a threat to economic growth ... especially if defaults are concentrated in labor-intensive segments like steel and coal,” Moody’s said.

While China’s commercial banks have been seemingly impervious to China's credit bubble, reporting higher first-half profits, while overall non-performing loans in Q2 remaining unchanged from Q1 (even if some analysts believe the real number is orders of magnitude higher), analysts cautioned that slower credit growth would eventually take a toll on banks’ profit margins. Just like in the US, net interest margins in China have fallen sharply in the past quarters following six successive benchmark interest rate cuts in 2014 to 2015.

For China’s top lender ICBC, the margin is forecast to narrow to 2.13 per cent in 2017 from 2.21 per cent last year, while China Construction Bank could report a drop of 27 basis points to 2.09 per cent in 2017, Thomson Reuters data shows.

Compounding the NIM decline and collapsing margins is Chinese banks' move to increase deposit interest rates this year to as much as 40% above central bank benchmark rates to lure depositors, statistics compiled by Reuters showed.

Part of the higher costs has been passed on to corporate borrowers. The price of loans as measured by the weighted average of loan interest rates rebounded to 5.67 per cent in June, from 5.22 per cent in September. But that will not be sufficient to cushion the impact on near-term profits.

“The most direct impact of the regulatory crackdown is on liquidity and profitability,” said Alicia Garcia-Herrero, chief Asia Pacific economist at Natixis. “Chinese banks will find themselves in a dilemma ... with more doors shut in the shadow banking, which has been a source of profits to offset the impact on net interest income.”

As a reminder, China’s economic growth has already been showed signs of fading in July when key economic indicators from retail sales, to industrial production to capital spending all declined while lending costs rose, but a hard landing is unlikely with Beijing keen to ensure stability ahead of a once-in-five-years Communist Party leadership reshuffle later this year.  What happens after, however, is very much an open question. Meanwhile, if Chinese banks only have 20% of their annual loan issuance quota left for the entire second half of the year, and if Beijing refuses to boost these quotas, the next global economic shock may be just several months ahead.


roddy6667 Mon, 08/21/2017 - 21:53 Permalink

ZH has been trying to predict huge problems in China as long as I have been reading it. Some years they have setbacks, but growth always happens. Every year people have better lives here than last year and ten years ago. 

Antifaschistische roddy6667 Mon, 08/21/2017 - 22:00 Permalink

your point is not lost on me.  China is full of hundreds of millions of people completely dedicated to improving their life condition.  Though...I think many of them are a bit too short sighted (e.g. make profits fast rather than long term focus on quality production).However, I've also noticed over the last four years my trips to China are getting cheaper and cheaper.  Is it just me?  Hotels that 4 years ago were $200 dollars (US) per/night are 1/2 what they were then?  That can't mean means something...but I don't know what.  tier 1 cities still expensive.  Everywhere else, prices have been declining for me.

In reply to by roddy6667

techpriest Antifaschistische Mon, 08/21/2017 - 22:30 Permalink

My Chinese in-laws are explaining it like this: as the crash gets rolling, the tier 1 cities will get into trouble last or not at all.

Chinese law heavily restricts moving from city to city, and there are millions of people with money in lower-tier cities who want to "move up." Some people there will marry just to get into a good city. If home prices start falling, they can open up access to Tier 1 cities to monied members of Tier 2/3 cities, thus more money will flow in to keep everything stable.

Of course, this will also mean a huge transfer of wealth out of mid-level cities and rural areas, driving those areas back into third world status. Hence the falling prices there.

The big question is whether they can successfully keep all of the wealth in the country. I spend a good bit of time with local Chinese students, and a common theme I hear is that everyone with money is trying to get their money and children out. The government has responded with mass passport seizures of Party members or state-owned company managers, particularly "lonely workers" whose family is living overseas. Such people are banned from leaving the country.

To quote the airport train where I grew up...

"Careful! Doors are closing and will not re-open!"

In reply to by Antifaschistische

roddy6667 gregga777 Tue, 08/22/2017 - 06:09 Permalink

900 million? 64% of the population? You are full of shit. 54% of China is now middle class by Western standards. Add to that the percentage that are blue collar and upper middle class and just plain rich, and that leaves a lot less than 900 million. Where do you get his propaganda? Have you ever been NEAR China? I have been living here for 5 years now and a lot of extended visits and trips inside China. Also, if 2 people in rural China earn $2 an hour for 40 hours a week That's $640 a month. or 4265 RMB. Add to that the Chinese Social Security, savings, and pensions of parents and older people living in the same household, that's solidly into blue-collar territory. Add to that the fact that they provide a lot of their own food makes their situation a lot farther from poverty. You know nothing about China, it's economy, how the people live, etc, yet you insist on making derogutary statements. What is your motivation? Why do you hate something you know nothing about?

In reply to by gregga777

fattail roddy6667 Tue, 08/22/2017 - 07:35 Permalink

Much like the West, the great chinese economy is built on the sand of expanding credit.  Once the credit growth stops, defaults will start and begin the deflationary spiral, unless the government steps in and begins the credit expansion again.  This will lead to a bigger bubble, or a declining Yuan, or both for awhile.  But eventually the bubble will burst and the Yuan will have to devalue lower substantially.  This is why chinese want to get their money out of china and into a a safer currency like the dollar or loonie or aussie dollar, or gold, or (dare i say it... oh what the hell) bitcoin.I believe the bitcoin spike, and the rally of its derivative BTC cash, and etherium, and the rest is just a function of the smart money collectively predicting the end is nigh for the chinese miracle. how the marginal return on GDP is gettinng less and less for the marginal increase in credit.  That can't be good.

In reply to by roddy6667

BeanusCountus roddy6667 Mon, 08/21/2017 - 23:50 Permalink

ZH predicting catastrophe? True. China funding growth through simple equation of increase in debt? True again. Easy to do when things are going your way. China has never been through a downturn since they opted for capitalism model. Might want to talk to the Japanese. Everything comes home to roost, but it takes time. We will see.

In reply to by roddy6667

MK ULTRA Alpha Mon, 08/21/2017 - 23:41 Permalink

The Chinese CB will print in the second half. This has been the pattern, an important bubble sector begins to drop or an over all decline in economic growth, they print to keep it up.

The more Yuan, the easier it is to payoff debt. The more Yuan, the cheaper Chinese goods for export. The Chinese mercantile export economy is dependent on cheap Yuan. Expect more printing to keep producing cheap goods to earn foreign hard currency to buy raw materials and foreign companies.

What this will do to the US economy and the strategic balance is anyone's guess. The US doesn't realize China is in an economic war even though over the next three years, the China trade deficit will be over a trillion US dollars. This is unfair trade, a one way street which must be stopped. Trump campaign promise was China was manipulating it's currency and this was unfair trade. But the Trump government reports, China is not manipulating it's currency. This from the globalist Tillerson State Department. Did it have anything to do with Tillerson's brain child, the huge Exxon refinery in China?

Jafo Tue, 08/22/2017 - 06:52 Permalink

The collapse occurs when the issuing of new debt slows down to a level that will no longer sustain the bubble.  That is what the GFC taught us.

aldol11 (not verified) Tue, 08/22/2017 - 09:23 Permalink

what a crock of shut.we have had sales and mfg in china for the local market since 2005. the country's economic and technical progress are both increasing  at an exceptional speedChina needs rapid  credit growth in order to support the economy