Chinese lenders have a massive challenge: They can't lend enough

Chinese commercial banks have a huge problem.

With consumers and businesses gloomy about the prospects of the world's second-largest economy, loan growth has stalled. Beijing's stimulus push has so far not been able to spur consumer credit demand, and is yet to spark any meaningful rebound in the faltering economy.

So what do banks do with their cash? Buy government bonds.

Chinese sovereign bonds have seen a strong rally since December, with 10-year yields plunging to all-time lows this month, dropping by about 34 basis points, according to LSEG data.

"The lack of strong consumer and business loan demand has led the capital flows into the sovereign bonds market," said Edmund Goh, investment director of fixed income at abrdn in Singapore.

That said, "the biggest problem onshore is a lack of assets to invest," he added, as "there are no signs that China can get out of deflation at the moment."

Total new yuan loans in the 11 months through to November 2024 fell over 20% to 17.1 trillion yuan ($2.33 trillion) from a year ago, according to data released by the People's Bank of China. In November, the new bank lending stood at 580 billion yuan, versus 1.09 trillion yuan a year earlier.

Loan demand has failed to pick up despite a sweeping stimulus measures that Chinese authorities started unveiling since last September, when the economy verged on missing its full-year growth target of "around 5%."

Goldman Sachs sees growth in the world's second-largest economy slowing to 4.5% this year, and expect credit demand in December to have slowed further from November.

"There is still a lack of quality borrowing demand as private enterprises remain cautious with approving new investments and households are also tightening purse strings," said