Emerging Insight: China – Will ample monetary liquidity continue to last?

Research evidence excerpt

Emerging Insight: China – Will ample monetary liquidity continue to last?

1. Weak sentiment among private sectors, including corporates and households:

Corporate loan demand has remained weak despite a continued decline in interest

rates (Exhibit 4), reflecting a cautious stance toward capital expenditure amid soft

domestic demand. At the same time, mortgage demand remains constrained by the

ongoing property downturn. While there have been some nascent signs of stabilization

in selected cities, these have been insufficient to drive a meaningful recovery in

nationwide mortgage demand. In addition, recent policy easing of housing provident

fund loans across cities has partially crowded out demand for bank mortgages, as

households increasingly rely on provident fund financing instead. This shift reinforces

the accumulation of surplus funds in the banking system.

2. Fiscal and bond financing are crowding in as substitutes for bank loans: 1)

As of end-May, 73% of the annual RMB2tn local government hidden-debt swap

quota has been utilized, and many have been used to swap for maturing loans. 2)

Separately, increasing corporate bond financing has also contributed to substituting

for bank loans (RMB1.45tn in Jan-May, vs. RMB878bn last year in the same period).

3. The shift in growth engines requires less direct support from bank lending:

1) Within domestic investment, the traditional property- and infrastructure-led

credit engine has become structurally less powerful. By contrast, faster-growing

sectors, such as high-end manufacturing and Technology, Media and

Telecommunications (TMT), tend to be less dependent on bank financing than

traditional capital-intensive industries. This structural shift helps explain the

moderation in demand for bank loans.