Banks look to China's 20th Communist Party Congress for policies to boost loans

Chinese banks will be watching the Congress of the ruling Communist Party, which starts Oct. 16, for signs of new measures to stimulate loan demand.

New loans jumped 39% year over year to 2.47 trillion yuan in September, according to data released by the People's Bank of China on Oct. 12. The increase was driven mainly by borrowing by companies, which often seek funding for ongoing projects in the last month of every quarter.

Still, household lending has remained sluggish in the world's second-biggest economy, raising concerns among analysts about whether credit demand can be sustained amid lingering pandemic-related restrictions and property market declines.

"The strong rebound in corporate loans echoes regulators' efforts of urging banks to expand new lending," said Wang Tao, an economist at UBS, while household loans — mainly mortgages — remained weaker than a year ago.

China's Communist Party Congress, held every five years in Beijing, is widely expected to give President Xi Jinping a third term. The event, attended by nearly 2,000 ruling party delegates, will determine the nation's top leaders for the next five years and set policies for the coming years.

Xi's third term is expected to emphasize continuity, including the government's focus on growth and housing market policy, said Ho Woei Chen, economist at Singapore's United Overseas Bank Ltd. in an Oct. 12 note. "Intensifying geopolitical tensions will be one of the most important concerns on the agenda," Ho said, referring to ongoing tensions between Washington and Beijing as well as the global impact stemming from the conflict between Russia and Ukraine.

Policy continuity

Although the People's Bank of China has continued to cut interest rates and the government has nudged banks to lend more aggressively, demand for household loans remains weak.

For the 10th consecutive month in September, medium- to long-term household borrowing, a proxy for mortgage demand, declined year over year, despite two straight months of narrowing contraction, according to the central bank. The property sector, the biggest store of wealth for individuals, has struggled with defaults and delayed housing projects, resulting in rare protests in July and August.

Despite the government's efforts to boost lending, UBS's Wang said overall credit growth in the fourth quarter would, at best, stabilize at the current pace due to weak property sales and developer financing.

Analysts interviewed by S&P Global Market Intelligence unanimously agreed that President Xi will return to power at the 20th party congress. There is also high interest about other senior officials in his team.

"At least two positions at the party's all-powerful Politburo Standing Committee will be reshuffled," said Aidan Yao, senior economist at AXA Investment Managers, speaking on expectations from the event. "Who will succeed Li Keqiang as the next Premier of the State Council and assume Liu He's role as one of China’s top macro policy decision makers will be very consequential to the economy and markets for the years to come."

Investors are also watching for signals that would indicate how China is committed to economic reforms amid the challenging economic outlook, Yao said. Indicators include whether the leadership will keep economic development at the center of national strategy, whether it will continue to open the economy, cut carbon emissions and liberalize the financial system, according to Yao.

Gross domestic product expanded just 0.4% year-over-year in the second quarter, from 4.8% in the first. That makes the government's target of 5.5% in 2022 appear out of reach. The IMF said Oct. 11 it expects China's GDP to grow 3.2% this year, lower than its previous forecast of 3.3%. Growth may recover to 4.4% in 2023, the IMF said in its latest World Economic Outlook report.

Loan demand

Loan demand rose modestly in the third quarter, according to the central bank's latest quarterly banking survey released Oct. 9. Respondents expect more accommodative monetary policy in the fourth quarter.

The survey that covered 5,000 enterprises also found that business conditions deteriorated further in the third quarter, likely on the back of protracted COVID-19 restrictions and subdued demand, while urban depositors showed less willingness to consume and more pessimism toward property prices.

"Only the government has the means to shore up confidence in China property," S&P Global Ratings analysts said at an Oct. 11 webinar. The measures to turn the sector around are becoming broader and more sweeping and are increasingly likely to come from Beijing, the analysts said.

For the banking sector, Ratings expects the broad measure of nonperforming assets ratio to worsen to 8.1% by the end of 2022, from 6.0% at the end of 2021, largely stemming from the stressed property sector and loans to micro and small businesses. Still, the sector on average has sufficient buffers to withstand the economic downturn given long-held conservative provisioning coverage, it said.

As interruptions related to COVID-19 across the country continue to hamper efforts by the authorities to boost credit demand and consumption recovery, the market is on the lookout for any possible relaxation to the zero-COVID policy.

But an "announcement of a shift from its zero-COVID-19 policy is unlikely at the Party Congress, and we also think hopes should not be pinned too high given recent endorsements of the policy by major newspapers in China," said Ho of UOB, citing state-run media reports that often serve as a source of government policy thinking.

As of Oct. 13, US$1 is equivalent to 7.17 Chinese yuan.