China hits ‘liquidity trap’ as low lending rates fail to boost bank lending
China’s low interest rates are failing to stimulate lending in the economy, creating a challenge for policymakers as they try to support the country’s fragile recovery.
Central bank data showed a sharp slowdown in overall funding, a broad measure of credit, in July on Friday as new loans and corporate bond issuance weakened.
Meanwhile, growth in M2, the broadest measure of money supply, accelerated more than expected to 12% in July. Taken together, the data shows banks are plentiful with cash but struggling to increase lending to customers amid weak growth and turmoil in the property market.
The data is a “classic sign of a liquidity trap,” said Craig Botham, chief China economist at Pantheon Macroeconomics Ltd. “Liquidity is plentiful, but no one wants it.” Under these circumstances, “monetary policy cannot do much to support the economy,” he said.
The People’s Bank of China has refrained from cutting key interest rates since they were cut in January and instead focused on persuading banks to increase lending, especially to targeted sectors like small businesses. However, defaults in the real estate sector and a weakening economy made banks reluctant to lend.
More recently, Beijing pinned its hopes on political banks to spur growth, allocating 1.1 trillion yuan ($163 billion) to be used to fund infrastructure projects.
The mismatch between liquidity and bank lending also increases financial risks, as market interest rates fall well below policy rates set by the central bank.
“Cash is building up in the interbank market and there is even a risk that money will be directed out of the real economy into the markets,” said Ming Ming, chief economist at Citic Securities Co. Money needs to better monitor changes in the market, take advantage of it and ensure that money flows into the real economy.
The central bank may be ready to curb some of the excess liquidity in the banking system on Monday through its medium-term lending facility operation. Eight of 12 economists and analysts polled by Bloomberg predict it will withdraw money through the MLF for the first time this year.
Friday’s data showed sharp declines in long-term loans to households and businesses from June, reflecting weak demand for mortgages and businesses’ reluctance to increase investment. This is despite separate data earlier this week showing that average interest rates for new mortgages and business loans eased in June.
Invoice financing, a form of short-term business borrowing, surged in July, according to Friday’s report. Funding is widely used by banks to increase lending scale and meet regulatory requirements in times of low borrowing demand.
Outstanding loans outstanding rose 10.7% to 334.9 trillion yuan, little change from the 10.8% expansion in June.
“Credit growth is particularly weak compared to last year,” said Zhang Zhiwei, chief economist at Pinpoint Asset Management Ltd. “It reflects that domestic demand is still quite weak” due to the ongoing Covid outbreaks and poor sentiment in the property market, he said. .