China’s Bank Lending Rebounds Amid Global Trade Turmoil | Image Source: www.ft.com
BEIJING, China, 9 April 2025 – In the face of growing global trade tensions and the worsening economic slowdown, the Chinese financial engine is trying to restart. According to several analysts and economists, China’s new Yuan loans probably increased to about 3 billion yuan (408.9 billion dollars) in March, rebounding sharply from demolition in February. This recovery in credit activity, although slightly below the 3.09 billion yuan extended in March 2024, suggests that the country’s central planners are actively working to stabilize growth under increasingly unfavourable global conditions.
As a Reuters survey among 11 economists indicates, the change in credit activity is due to the Chinese government’s commitment to stimulate domestic demand and protect the financial system from external shocks, in particular a deterioration in trade relations with the United States. The investigation suggests that if these forecasts were maintained, China would have issued 9.14 billion yuan in new loans for the first quarter, slightly less than the figure of 9.46 billion yuan in the first quarter of last year. However, it shows a resilience that many fear disappearing.
What factors motivated Mars’ rebound in bank loans? Several forces converged to stimulate the issuance of loans in March. The most important catalyst was the apparent willingness of the People’s Bank of China (PBC) to participate in monetary relief. As stated in the State People’s Daily, policy makers can use measures such as the RRR ratio of interest rate reductions and reductions. The enabling environment, as well as the deliberate increase in budgetary spending and the issuance of special cash bonds, are designed to help China navigate one of the most difficult economic years since the global financial crisis.
At the structural level, financial authorities are strongly inclined in the country’s four major state banks to support the credit surge. Last week, these institutions collectively announced a total of $72 billion in recapitalization plans, a movement directly aligned with Beijing’s strategic goal of improving capital adequacy and ensuring the sustainability of balance in the middle of the beer storm.
How do trade tensions between the United States and China complicate China’s growth strategy? According to FT and Yicai, the trade war between the world’s two largest economies is more than a political theatre, which now threatens the foundations of China’s economic model. After US President Donald Trump put in place a new set of tariffs that raise average tariffs on Chinese goods to an unprecedented 104% rate, China’s response was rapid and proportional, triggering a cycle of retaliation that risks using global trade flows.
Citi, one of the largest voices in global financing, responded by reducing China’s GDP forecast by 2025 from 4.7 per cent to 4.2 per cent, noting that higher tariffs could reduce at least 1.5 percentage points of annualized GDP. The decline in exports is beginning to flow under domestic credit conditions, particularly in banks that are highly exposed to export-oriented sectors.
Which banks are the most vulnerable, and why? According to Dai Zhifeng, a leading analyst at Zhongtai Securities Banking, the impact of these reciprocal rates is not felt uniformly across the financial sector. Export financing institutions and banks providing cross-border services are reduced as commercial credit and foreign exchange settlement diverge. Another growing concern is the narrowing of net interest margins, bread and butter in bank yields.
“The emergence of an export credit deficit can affect business credit rates, putting increased pressure on net interest margins”
Dai warned, emphasizing that the reduced appetite for credit among import-export companies could ripple across loan portfolios and erode asset quality in pockets of the banking industry.
It should be noted that banks with high exposure to international customers are seeing a decrease in the volume of cross-border settlement, a red sign for institutions that rely on transaction rates and FX services as a constant source of revenue. Pressure has even hit stock markets: after the announcement of new tariffs, Chinese stock markets have declined. Shanghai Composite fell by 7.3%, Shenzhen’s component index by 9.7% and ChiNext’s Technology Council collapsed by 12.5%.
Can monetary policy adjustments cushion the shock? The short answer: partially. According to Zhongtai Securities and other analysts, the Chinese monetary authorities still have some tools in their arsenal. The reduction of the RRR, the reduction of fixed deposit rates and the increase in budgetary spending are among the main levels envisaged to manage liquidity and reduce borrowing costs. These adjustments are considered effective in mitigating the impact on net interest margins, in particular for banks most vulnerable to falling demand for loans.
However, these interventions are not without risks. Excessive reliance on monetary reduction could exacerbate long-term financial imbalances or real concerns about non-functioning loans. The key, according to experts, is a balanced approach that supports loans, while ensuring that credit expansion does not fuel excess or debt-fed speculative bubbles.
How is the demand for business credit and consumer credit changing? Despite the monetary winds, Reuters’ investigation suggests that the underlying demand for credit remains hot. Citi analysts noted that the discount rate for invoices – an indicator of liquidity in the banking system – remained subject throughout March, indicating an always cautious business climate. In the meantime, domestic loans have in no way been significantly collected, even though banks have reduced their share of consumer loans. This may reflect a deeper feeling: if consumers and businesses pay attention to income or future benefits, it is unlikely that loans will be taken aggressively, regardless of how cheap credit is.
In response, government decision makers are doubling their strategies to boost retail credit growth. These include ordering banks to issue more personal and mortgage loans, providing credit guarantees, and even subsidizing interest rates in some provinces. While these efforts may lead to short-term activities, they also raise questions about the quality and sustainability of these loans.
What does this mean for investors and the stock market? Interestingly, while China’s global stock market fell sharply after the last tariff escalation, bank shares were relatively resilient. Shenwan Bank’s stock index decreased by only 4.7%, exceeding the most important indices. This divergence, according to analysts, is linked to the recognition in the market of the sector’s defensive features - high dividend returns and low price/benefit ratios – that tend to attract investors in times of higher volatility.
As a result, some investors are beginning to view bank shares as a hedge against market instability. Further cash reductions are also expected to reduce bond yields, increasing the attractiveness of dividend payment shares. However, this sentiment largely depends on the assumption that the quality of credit and capital shock absorbers will remain under pressure, a scenario far from guaranteed.
What is the prospect for the rest of 2025? In the future, much will depend on two things: aggressive China is ready to stimulate, and if trade tensions increase even further. With Citi’s degraded GDP forecasts reflecting growing pessimism, the policy margin of error is reduced. According to the latest estimates, the stock of Yuan loans in March is expected to increase by 7.3% during the year, a fixed rate compared to February, while the growth in M2’s monetary supply is expected to accelerate slightly to 7.1%.
Total social financing (STF), which includes both balance sheet and parallel banking activities, probably reached 4.8 billion yuan in March of only 2.23 billion in February, a clear sign that liquidity is pumped into the system. However, without a simultaneous increase in demand for productive credit, such liquidity may stagnate in the financial system or flow into unproductive sectors such as speculative real estate or parallel lending platforms.
For now, China seems determined to maintain its ambitious growth target of 5% by 2025. But as external shocks and internal imbalances increase, this ambition will be tested every turn. The resilience of its banking sector in particular will be the essential basis of the fragile global architecture of post-pandemic recovery.
