The Credit Engine Behind China’s Economy Is Sputtering

Cheap lending to low-quality borrowers renders one of Beijing’s prime policy tools less efficient.

By Joseph C. Sternberg. Excerpts:

"Beijing itself doesn’t believe the economy is improving. Officials this month promulgated a series of economic plans centered on a GDP growth target of 4.5% to 5%, the lowest since 1991. In part that target sends a signal from the senior Communist Party leadership to other officials that Beijing will tolerate some of the pain of an economic adjustment. Local cadres shouldn’t rush to juice the stats with excessive lending and white-elephant public-works projects."

"It’s widely understood that the government economic data concerning GDP growth are a lie intended to flatter the party."

"Since Mr. Xi embarked on the property correction in August 2020, Beijing has tried to steer the economic rebalancing carefully—sometimes allowing fate to run its course by bankrupting some companies or stressing some local governments overexposed to off-balance-sheet real-estate lending, other times arresting the decline with old-style policy hacks such as credit subsidies."

"Evidence is accumulating that Beijing’s firepower is running down"

"the total rate of credit growth is slowing dramatically: to 6.1% year-on-year in January, compared with an average of 9% a year in 2017-24 and 18.1% in 2007-16."

"Some 58% of loans in December were made at interest rates at or below the official benchmark lending rate of 3%"

"that proportion has risen steadily over the past couple years"

"This suggests banks are struggling to find borrowers (read: in the private sector) that could generate returns above 3%, which is remarkable in a developing economy with enormous potential for catch-up growth"

"banks are lending to inefficient state-owned enterprises and investment pools linked to local governments. Cheap lending to low-quality borrowers then weighs on bank profits, hindering future productive lending"