China: Banks rather buy bonds then lend money

Under the situation of a slowing economy, the central bank of China has recently been lowering the bank reserve ratio to reduce capital returns and cancellation of the loans limit in order to try to have the commercial banks increase lending activities.

However, considering and worrying about risks, commercial banks while having ample liquidity, used the funds to tender for government bonds rather then lending the money out. This means that in the short term, investments will still remain weak.

According to people in the industry, The Export-Import Bank of China yesterday in its interbank bond issue of 3.6% 15 billion yuan 10 year fixed interest notes, have a total tendered amount of about 171 billion yuan, a 11.4 times tender rate.

At the same time, 2 night ago, the central bank of China announced that it would from the day before issue the 3 months government bonds fortnightly rather then weekly. And a week ago, the central bank of China announced that it will it will issue the 1 year government bonds fortnightly rather then weekly and will reduce the issue amount. Analysts said that the recent craze for government bonds by banks forced the central bank of China to reduce its issue of government bonds.

In actual fact, before this, the central bank of China at the end of October announced that it will not impose strict restrictions on commercial banks loans, which means that the amount of money that banks can use for lending out is greatly increased.

Although the central bank of China has lowered the interest rates several times, commercial banks one-year benchmark lending rate is as high as 6.6% and commercial banks actual lending rate can float above that value. Comparatively, currently the 1 year government bonds interest rate is only about 3.21%.

Bank of China spokesperson 王兆文 confirmed that currently banks are very cautious about loans. He mentioned that although the loans limit has been removed, but considering the risks, Bank of China is not likely to issue out large amount of loans. He said that Bank of China will choose to issue out loans to companies with good ratings.

Another trader of a bank in ShangHai mentioned that in the economy downturn cycle, part of the credit ratings of certain industries have decreased. Banks although having ample liquidity, is very cautious about lending out money which leads to the large influx of funds into the government bonds.

As such, the central bank of China have to issue government bonds fortnightly rather then weekly and reducing the issue amount in order to encourage banks to put more efforts in lending out their money to ensure the smooth functioning of the economy.

According to figures, when the central bank of China in August period increased the loan limit by 5%-10%, from January to September this year, China's financial institutions total loan amount is about 3.48 trillion yuan, a 3.6% increase from the same period the year before, much lower than the 22% of the previous year January to September period, an obvious slowdown in money lending activities.

Senior Economist 范建平 from the China State Information Center said that because banks do not want to lend out money, the effect on lifting of the loan limit is not significant. This means that in the short term, investments will remain weak.

Analysts said that because banks are not willing to lend out money, the China government needs to take more actions in order to stimulate the economy. This may mean that the central bank of China may further lower interest rates or come out with big scale financial stimulus packages in order to stimulate China domestic spending.