Almost all of new mainland loans last month were taken out for home mortgages, while lending to corporate borrowers shrank, central bank data showed, flashing an early sign of “balance sheet recession” in part of the world’s second-largest economy.
While mainland banks extended 463.6 billion yuan (HK$542 billion) in new yuan loans last month, lending to non-financial entities fell by 2.6 billion yuan, meaning businesses repaid more to banks than they borrowed in July even though Beijing is trying to channel credit into “real economic activities”.
“It’s not a good sign,” said Louis Kuijs, head of Asia economics at Oxford Economics in Hong Kong. “When corporates stop borrowing or stop getting credit, that’s not a good thing.”
The lending data, released as part of the People’s Bank of China’s monthly financial figures, accompanied a slew of economic numbers showing economic growth is losing steam quickly as private investment and infrastructure spending plunges.
In a balance sheet recession, a theory developed by Richard Koo, the chief economist of Nomura Research Institute, businesses focus on saving or repaying debts rather than investing, leading to weaker economic activities such as Japan has witnessed since the early 1990s.
While the mainland is still not in a classic balance sheet recession, economists are flagging such risks after smelling the danger in parts of the country’s economy.
The mainland unleashed an unprecedented amount of bank credit in early 2016 in the hope of kick-starting investment and production, but a chunk of the cash just sits idle in corporate accounts. Mainland firms’ cash holdings reported an 18 per cent jump during the second quarter to US$1.2 trillion, according to data compiled by Bloomberg.
Wei Yao, a China economist with Societe Generale in Paris, said the July data reflected a structural problem within the Chinese economy.
“Some bank credits are not used in real economic activities but in speculative activities in the housing markets,” Yao said.
She added that the July data seems to move away from mindless credit-fueled growth. “For China, headline growth is only half, maybe even less than that, of the story,” she said.
The contraction of corporate lending in July further proved “the weak investment intentions from the private sector” as companies are more willing to hoard cash than to invest, said Shao Yu, chief economist at Oriental Securities in Shanghai.
On the other hand, data for household lending, the majority of which are individual housing mortgages, indicated a strong zeal by Chinese for buying property in some major cities for risks aversion, Shao said.