This article is the last of the 2020 Economic Review and is about the overall shift in the style of banking in 2020. This shift is not only at the commercial bank level, but also at the central bank level, where fundamental changes have occurred. This change is bound to profoundly affect the course of the Chinese economy in 2021.
The first thing I’ll give here is the data on bank loan investment, and note the most important change: the proportion of loans invested in manufacturing in 2020 has finally started to rise.
The share of medium- and long-term loans to manufacturing, which was 5.80% in 2019, rises to 6.17% by 2020. This is the first Time in nearly 10 years that the share of manufacturing loans has increased. You should know that my big China until the trade war in 2018, finally began to realize that manufacturing is the king, relying on financial speculation and real estate development, is not able to reshuffle the world economy in the context of a foothold. However, it is not so easy to change course immediately, so that the flow of funds from the financial and real estate sector to the manufacturing sector, so the share of manufacturing loans continues to shrink in 2019, which is the inertia of the financial operation.
This inertia, of course, the top of my “Great China” is intolerable, especially in the context of the Epidemic control in early 2020, the manufacturing industry is waiting to be fed, and if we do not use strong means to push the funds to the industrial sector to save the manufacturing enterprises in deep water, then my “Great China” economy really will not be able to hold on. So, in March 2020, the president of CITIC Bank, Sun, was pushed to the forefront and became a counter-example.
Note the paragraph marked in red above, “seriously contradict the decision to deploy financial services to the real economy, restrict and depress manufacturing loans”, everyone, not to lend money to the manufacturing industry, even can constitute enough to let the Commission for Discipline Inspection to intervene in criminal offences, this action on the spot shocked all the financial professionals in the country. The entire financial circle began to turn, from looking down on manufacturing bosses, to begging manufacturing bosses loans, loans a little less is not happy, crying and even backwards to these bosses to send gifts, in the hope of more loans. It is in this context, the manufacturing loan ratio, finally appeared a very rare upward trend. In the absolute value of the loan balance, the manufacturing loan balance rose from 9.2 trillion in 2019 to 11.0 trillion, an increase of 1.8 trillion in absolute terms, an increase of 19.6%, the highest increase in history, before the annual increase in the manufacturing loan balance was only between 3-7%, which is really no shame. This 1.8 trillion incremental manufacturing loans, accounting for 19.8 trillion incremental total loans, reached 9.1%, more shocking ratio, almost every 10 dollars of loans, a dollar to the manufacturing sector, while in 2019 this ratio is only a pathetic 3.6% only.
Another very interesting change is that in 2020, banks really increased their lending to micro and small enterprises. The share of loan balances for micro and small enterprises has increased from 23.26% in 2019 to 23.93% in 2020. The absolute value of micro and small business loan balances increased by $5.8 trillion, far exceeding the previous annual increase of $3-4 trillion.
Ladies and gentlemen, you must realize one thing clearly: there is a reason why banks are reluctant to lend money to manufacturing and micro and small enterprises.
According to the annual report data of major banks, from 2010-2019, the bad debt rate for manufacturing loans and micro and small business loans, generally, is between 5-7%, which is already a very high bad debt rate. Real estate type loans (including development loans and mortgage loans), on the other hand, are generally below 1%. Even for loans to agriculture and agriculture with a higher degree of risk, the bad debt rate is only about 2%. The rule of banks is that bad loans need to track the responsibility of everyone in the lending approval chain, and it is a lifetime responsibility. By comparison, of course, no one wants to lend to manufacturing and micro and small businesses.
Time to enter the year 2020, the great global closure, no blood transfusion to the manufacturing industry and small and micro enterprises will die. Europe and the United States play is the government directly to the business difficulties of enterprises and individuals living without cash subsidies, I “Great China” does not implement this cash subsidy policy, to take an indirect approach: the largest policy pressure, requiring banks to increase loans to industry. This is in fact the responsibility of the banks to subsidize industry instead of the government.
The result of this subsidy, of course, is that the banking sector’s bad debt ratio rises significantly in 2020, while profits fall significantly. For example, in the first three quarters of 2020, ICBC’s profits fell by 9.15% year-on-year, Agricultural Bank fell by 8.49%, Bank of China fell by 8.69%, and CCB fell by 8.66%, which is undoubtedly the result after assuming the responsibility of subsidizing industry.
Considering that this wave of bank loans to manufacturing and small and micro enterprises is based on the results of strong policy pressure, approval and risk control gate-keeping must be loose, it is conceivable that the bad debt rate must exceed the traditional 5-7% range, let’s assume 10%, which is already a relatively conservative estimate. 5.8 trillion new loans to small and micro enterprises balance ✖ 10% = 580 billion. This means that the banking industry will face an additional $580 billion of bad debt risk in 2021. This does not count the risk of new bad loans from manufacturing enterprises above the scale that are not micro and small enterprises. The combined estimate is more than 600 billion.
The point is that the bank subsidies to industry do not end in 2020. Vaccines are not estimated to be widely available until July or August 2021, which means that the banking sector will still be responsible for subsidies in place of the government for most of 2021. In other words, the banking sector’s bad debt risk will have to be further magnified. Of course, I personally am actually happy about this. Banks have been living a good Life for decades, and now it’s time for them to feed the industry. Even if the banking industry as a whole into a zero-profit situation, it is also desirable, I am in favor of both hands and feet. My only proposal is: for the industrial loans released in the past two years, as long as the staff in the approval chain are not involved in personal interests, then do not pursue personal responsibility for bad debts. This is also considered a little political protection for the relevant bank staff who have assumed responsibility for industrial subsidies.
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