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Cautious Banks Confront Weak Credit Demand

China’s banking system has operated as a shock absorber for the real economy over the past decade, providing credit to struggling enterprises in response to slowing growth—but banks cannot do so any longer. Beijing’s deleveraging campaign has profoundly changed the banking system over the past five years, with trillions of yuan in shadow banking assets migrating back to the loan book, exposing new financial risks. Banks have now turned risk-averse just as credit demand is softening from both households and corporates. For now, Beijing’s continued difficulties in boosting credit growth have forced a turn to additional fiscal spending to boost infrastructure investment.

Posted July 6, 2022
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