Banks Refuse to Lend, Don't Want to be Caught in Default Storm

This article shows there's a big split in China over the current monetary conditions and their cause. Some see monetary conditions as stable and even easing slightly. SMEs see a very tight market. Sentiment has clearly changed. Banks fear taking on bad debts. One banker blamed the companies for their own plight, saying they took on too much debt, are poorly managed and expanded beyond their fields of expertise. They assume the government will step in and bail everyone out. The banks clearly don't expect a bailout, at least not yet, and so are refusing to step in and risk taking on bad debts. In other words, an SME desperate for credit is advertising itself as a default risk. As one analyst says, the monetary policy isn't really tight, it is that investment confidence has fallen. In isolation, RRR cuts have no impact on investment confidence. As long as bankers are investors are worried about default risk they will not lend and invest, no matter what their capacity. Sentiment has turned and the mood is turning negative.

21st Century: 货币政策松紧争议升温，破解“紧信用”是关键

One side believes that China should follow the Fed to speed up the pace of monetary policy tightening and avoid an excessive narrowing of the spread between China and the United States, leading to a sudden increase in capital outflow pressure. In particular, the recent trade war escalation led to a sharp increase in the pressure on the RMB exchange rate downward pressure, and it is necessary to take a tighter monetary policy to boost The RMB exchange rate attracts foreign investment.

The other side believes that the growth rate of social financial growth in May is comparable to that of the previous year. In addition, the recent increase in corporate credit debt defaults and the downturn in the stock market indicate that financial deleveraging is experiencing “negative effects” and that monetary policy should be appropriately relaxed to boost the market and avoid economic downturns.

"At this moment, all parties are stubborn, and no one can convince anyone," said a brokerage macroeconomic analyst.

The official line is stable policy. FWIW, I do not believe this is propaganda, rather it is the policymaker's intent:

However, on June 18, the official website of the Central Bank published an article concerning responsible persons accepting media interviews, saying that a stable and neutral monetary policy has achieved good results and the banking system has a reasonable and stable liquidity. In spite of some material breaches, the newly added defaults were generally distributed in a dot-like manner, and there was no trend of risk concentration. The overall level of bond default rate was not high. As of the end of May 2018, the unpaid amount of corporate credit bonds after default was RMB 66.3 billion, accounting for 0.39% of the balance.

The executive meeting of the State Council two days later pointed out that it is necessary to adhere to a stable and neutral monetary policy, and to maintain reasonable liquidity and financial stability.

This seems to give an answer to the tight competition. Guotai Junan macroeconomic researcher Hua Changchun issued the latest report, pointed out that the current trend is quite clear - the monetary policy margin is slightly relaxed, hedge macro-prudential tightening; fiscal policy is "blocking the back door, open the front door," regulate the local government financing channels, but the overall Still a proactive fiscal policy.

What's the risk? Something goes wrong. What could go wrong? Investor confidence.

However, whether the policy can achieve the maximum effect or not, the difficulty lies in whether the implementation level can form a joint force, for example, hedging macro-prudential tightening at the margin of monetary policy, although the central bank has used liquidity adjustment tools such as directional cuts, collateral expansion, etc., if not The adjustment of the corporate structure and the establishment of a long-term mechanism for the regulation of real estate control are difficult to resolve the financial risks left by the previous round of monetary expansion and the side effects of current credit risks.

“Actually, under the environment of stable monetary, broad credit, and tight credit-based financial supervision, how to moderately relax the tight credit policy and solve the problems of credit debt defaults and corporate financing difficulties in the process of financial deleveraging, and guide the market to resume Investment confidence may be the key,” said the broker’s macroeconomic analyst.

Fragile.

Many 21st Century Business Herald reporters learned that current corporate financing situation is undergoing polarization: one side is state-owned enterprises, high credit rating private enterprises, large enterprises can continue to obtain large amounts of funds through loans and issuance of high-grade credit bonds, and the other side has a low credit rating. Private enterprises and small and micro enterprises have increased the number of defaulted credit debts, and they have almost never been favored by capital.

“Now it is almost impossible for private enterprises with a credit rating below AAA to issue new short-term financing bonds and corporate credit bond fundraising. Even if the annualized interest rate exceeds 12%, the capital market will not dare to take over.” Bluntly. In addition, the operating regulations of the new asset management regulations have not yet been settled. Some banks and trusts and other institutions have suspended non-standard and bond financing businesses, further exacerbating the difficulty of corporate financing. This is one of the main reasons why many people have called for a moderately loose monetary policy.

This is how bear markets begin.

M2 and GDP growth are highly correlated as shadow banking contracts:

Specifically, before 2008, banks mainly provided funds to the real economy through traditional credit methods, and the correlation coefficient between the growth rate of M2 and the growth rate of GDP was 0.24. After the financial crisis in 2008, with the introduction of large-scale economic stimulus policies and massive bank lending, In the meantime, the correlation coefficient between M2 and GDP growth rate fell to 0.18. In the past one or two years, financial de-leveraged, the internal financial circulation in the financial system kept shrinking, and a large amount of funds flowed directly to the real economy. Only M2 and nominal GDP growth during March 2017-2018 The correlation coefficient rose to 0.64.

In his view, the current marginal leverage of financial deleveraging can be gradually slowed down. Compared with the previously tight monetary policy, the central bank should consider adjusting and lowering standards, MLF, and other tools to make monetary policy more stable and neutral.

In fact, a number of bank financial market traders frankly stated that since the beginning of this year, the margin of monetary policy has tended to be loose, and the interest rate has been reduced in the financing market.

New credit spends as real demand in the economy. When credit rises to multiples of GDP, growth in credit represents an increasing share of nominal GDP growth. At a certain point, it is impossible to avoid a serious slowdown or recession because simply slowing credit growth causes a substantial decrease in demand.

As for reflexivity:

In his view, under the pressure of the current global currency differentiation triggering a new high of the dollar in the year, the reason why the RMB exchange rate did not depreciate sharply was an important reason that the opening up of financial markets this year has attracted a large number of offshore capital to invest in domestic bond markets. In the first quarter of this year, China’s capital and financial accounts created a surplus of US$28.2 billion, driving reserve assets to increase by US$26.2 billion, largely offsetting the pressure of capital outflows from the US dollar hawks raising interest rates.

“The reason why overseas funds are willing to invest in the domestic securities market is on the one hand the relative strength of the RMB exchange rate. On the other hand, the China-U.S. spread has always remained above 70 basis points.” He admitted that if the Fed continues to raise interest rates by hawks and China does not follow, Overseas funds will worry that the interest gap between China and the United States has narrowed significantly, and the increase in trade frictions between China and the United States will eventually trigger a surge in capital pressure.

Banks don't want to lend:

Many 21st Century Business Herald reporters learned that current financial institutions are generally cautious about corporate finance. On June 1st, the China Insurance Regulatory Commission issued the "Administrative Measures for the Administration of Credit Granting to Banking Institutions (Trial)". Many city banks acted swiftly and established local credit balances of over 2 billion yuan. Local companies with more than three lending banks established joint credits. The mechanism adopts anti-risk de-leverage measures that do not provide renewal for enterprises with high debt ratios.

“Actually, the regulations stipulate that banks can voluntarily establish a joint credit mechanism for such enterprises and form a certain degree of flexible operating space to help companies tide over the financing difficulties. However, in the financial deleveraging and risk prevention environment, banks prefer to let their companies suffer a lot. One point, do not want to let themselves into a bad debt crisis." A city commercial bank credit department director frankly told the 21st Century Business Herald reporter.

In addition, the supervisor heard that many city commercial banks suspended the investment banking business in view of the failure of the new rules on asset management, suspended the supply of non-standard assets for large local companies, or set aside a financing plan for debt issuance, which objectively caused the company's capital chain to be stretched. A person in charge of a large local private enterprise stated that he was the "victim" of this situation.

“Local joint-stock companies and state-owned banks are tightening credit. Every week, I have to run two or three local city commercial banks and rural commercial banks to see if there is any room for credit to make room for capital. But they told that they couldn’t provide companies with new loans and old support. In the first quarter of next year, the interbank certificates of financial institutions with asset sizes of 500 billion yuan or less will be included in the MPA assessment, and the scale of off-balance-sheet businesses will be further compressed. It is hoped that the company can repay the previous principal interest rate of structured financial products as soon as possible.” He told the 21st Century Business Herald reporter bluntly this is the bank's strictest lending standard that has been seen in more than 10 years since its establishment. If he uses most of the company's cash flow to repay loan principal and interest, the business will soon stagnate.

The banks disagree on the cause of the tight credit conditions:

“However, it needs to be differentiated by the recent increase in the number of credit debt defaults and increased difficulty in financing the enterprise. In the end, it is the lack of liquidity in the market, or is the result of excessive expansion of the debt-supported business.” The head of the credit department of the above-mentioned city commercial bank emphasized that currently more than a few companies' problems are more or less related to their own poor management, including lack of corporate cash management capabilities, blind expansion, and involvement in unfamiliar industrial fields. Once a company encounters financial difficulties, it expects the government to release liquidity, and it is inevitable that there is a "suspicion" of risk transfer.

The targeted nature of intervention supports the wider view of stable monetary policy:

It is worth noting that since the beginning of this year, the central bank has targeted to release more than 400 billion yuan of funds, continued to use credit policies to support refinancing, rediscounting, and PSL tools to guide financial institutions to increase the number of small and micro enterprises, "three rural issues", poverty alleviation and Shelf reform, water conservancy, and other major areas of national economy and weak links support efforts.

In the opinion of the above-mentioned macroeconomic analysts of brokerage firms, this seems to imply that the relevant departments believe that financial deleveraging mainly brings financing difficulties to specific entities such as small and micro enterprises, and that they need to take measures such as targeted cuts to ease the difficulties. As for the cash flow difficulties caused by blind expansion or mismanagement in many enterprises, it is necessary for companies to solve the problems themselves.

Modern banking requires a lender and a borrower to create credit. If there are no borrowers or lenders refuse to lend, credit creation contracts. The Chinese government can force lending and borrowing through local governments and SOEs, but thus far there is no sign of another stimulus.