Chinese banks handed out a record amount of new loans last month to help China’s ailing economy, central bank data showed on Tuesday.
The 2.51 trillion yuan (HK$3 trillion) in loans
READ MORE: China’s commercial banks face HK$1.45 trillion in ‘non-performing loans’: bad debts rise to highest level since 2009
It also marked a hefty rise from the previous record of 1.89 trillion yuan in March 2009 when China was in the midst of a financial crisis and rolling out a massive stimulus package.
The unprecedented amount of new credit from banks in a single month comes as growth in the world’s second largest economy is rapidly slowing. China’s economy grew at its slowest rate in a quarter of a century last year.
The risk of bad loans is also rising quickly and undisciplined lending from banks is set to add to pressure weakening the yuan exchange rate despite signs of the currency stabilising in recent days.
Kyle Bass, the founder of Hayman Capital Management, wrote in a note to investors last week that “rapid credit expansion in the Chinese banking system will result in significant credit losses that will require the recapitalisation of Chinese banks and materially pressure the Chinese currency”.
The top US hedge fund manager warned that China’s banking system losses “could exceed 400 per cent of the US banking losses incurred during the subprime crisis”.
Bass wrote that China has conducted the “largest banking system experiment in world history” by encouraging its banks to undertake massive infrastructure funding programmes.
Chinese banks will lose approximately US$3.5 trillion of equity if China’s banking system loses 10 per cent of assets, he wrote.
Chinese commercial banks ended last year with non-performing loans at their highest ratio since June 2009, according to official data.
The China Banking Regulatory Commission said on Monday that 1.67 per cent of loans by year-end were non-performing, up from 1.25 per cent a year earlier.
In terms of value, the stockpile of problematic loans on Chinese bank account books hit a decade high at the end of 2015.
Meanwhile, the People’s Bank of China is clearly aware of the correlations between domestic lending and the yuan exchange rate.
In its latest quarterly monetary policy implementation report, the central bank said it was reluctant to ease monetary policy too much to hurt the stability of the yuan.
READ MORE: China foreign-exchange reserves drop as PBOC supports yuan
A cut in banks’ required reserve ratio may lead to “growing pressure on the local currency to depreciate”, capital outflows and a drop in foreign exchange reserves, according to the central bank report.
Xu Gao, chief economist at Everbright Securities, wrote in a research report published before the data was released: “The central bank has made it very clear that the room for domestic monetary policy easing is restricted by the policy goal of keeping a stable yuan exchange rate.”
Thanks to strong bank credit, the broad measure of credit available for the Chinese economy also hit an all-time high in January.
China’s aggregate social financing, which covers bank loans, trusted loans, commercial paper credit, bonds and stock financing, stood at 3.42 trillion yuan in January, nearly double the 1.82 trillion yuan in December last year.