China’s Surging Industrial Loans Aren’t Going to Its Factories


(Bloomberg) — As China’s industrial capacity emerged as a key trade issue, a surge in Chinese bank loans to the sector has often been cited as evidence that Beijing is engaging in a renewed manufacturing push that could flood global markets with cheap goods.

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But an examination of those loans by researchers at Rhodium Group showed a significant amount of the money didn’t go into manufacturing at all. Instead, the credit growth was inflated by lending to local government-related entities and financial speculation, they found, highlighting inefficiencies holding back the world’s second-largest economy.

The share of loans to manufacturing companies in overall new industrial credit declined to 63% in the fourth quarter from 80% in early 2020, Rhodium said in a April 24 report, citing an analysis of official lending data.

“The reality is that China’s domestic credit demand is extremely weak,” Rhodium analysts including Endeavour Tian wrote. “The financial system is highly inefficient, channeling new credit into financial arbitrage and local debt restructuring, rather than new manufacturing investment.”

Manufacturing is at the heart of China’s attempt to return the country to rapid growth after a real estate crisis dented its outlook, although the strategy risks further worsening trade tensions with the US and the EU.

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The growth of outstanding medium- and long-term loans to the industrial sector has accelerated since 2020, reaching 33% on-year in mid-2023. Real estate loans slowed down sharply during the same period as the property market tumbled.

But Rhodium found much of the increase in industrial loans were driven by banks’ refinancing to local government financing vehicles — companies that borrow on behalf of provinces and cities to fund infrastructure — as well as extended loan repayment for small firms during the pandemic. Many companies also took cheap bank loans and channeled them into long-term time deposits and investment products to gain a profit.

This explains the disconnect between a surge in headline industrial loan growth and a slowdown in manufacturing investment growth from 2022 to 2023, the researchers said.

“Other sources of funding are likely more important drivers of Beijing’s industrial policy push at present, rather than state-owned commercial banks,” they wrote.

China’s top leaders in October called for “more financial resources to be used to facilitate technology innovation and advanced manufacturing” during the Central Financial Work Conference. In a document published in April, the national financial regulator vowed to lift the proportion of mid- and long-term loans to the manufacturing industry in overall credit.

But in a sign of worries over inefficient loan use, the People’s Bank of China has in recent months vowed to look into “idling” money in the financial system that isn’t benefiting the real economy. The central bank is “closely monitoring” the practice of companies taking out loans to transfer them into deposits, and stepping up efforts to ensure funds are used more efficiently, Deputy Governor Xuan Changneng told reporters in March.

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