Record-breaking yields for low-risk financial instruments point to a reluctance by Chinese banks to lend directly to the real economy despite a concerted push from regulators for greater financial inclusion.
Yields on banker’s acceptance bills in China hit a record low of 0.007% on 23 December, highlighting strong demand for the instruments from Chinese banks seeking to fulfil annual state-imposed lending quotas, according to a report from the Financial Times.
Given that the average cost of capital for Chinese banks was 2.5% for the same period, banks would appear to be prefer to sustain losses on the instruments instead of taking the risk of issuing loans directly to businesses for higher returns.
“Our losses from buying banker’s assurances are smaller than lending to unqualified businesses,” said an executive at Zhongyuan Bank to FT.
Banker’s acceptance bills are technically classified as loans in China, enabling banks to use them to fulfil lending quotas imposed by the government.
Because they are issued by lenders to clients with deposit accounts or other forms of collateral, they are considered far safer than conventional forms of lending.
Beijing has stepped up its push for greater lending to the real economy and smaller businesses in particular ever since the onset of the COVID-19 pandemic.
Bankers say this puts them in a quandary however, given that they also need to keep bad debt under control, while the Chinese government has cracked down on sectors such as real estate and private education, where many of the best lending prospects were to be found.
The Chinese government has committed to containing the “disorderly expansion of capital,” especially in the wake of the Evergrande debt debacle which has left the real sector hard hit.
According to FT efforts by Beijing to tighten up mortgage lending led to double-digit year-on-year declines in total social financing for three consecutive months from July to September.
The People’s Bank of China (PBOC) subsequently moderated its firm stance in December, injecting liquidity into the economy via cuts to reserve requirements.