China’s credit growth has rebounded in Q1 following aggressive PBOC easing steps to reduce banks’ funding rates. However, actual credit demand in the real economy remains very weak, and approximately one-fifth of new credit extended in Q1 is apparently sitting idly at banks earning risk-free arbitrage spreads after being redeposited.
Banks’ structured deposits, a key funding product under strict scrutiny from regulators over the last two years, rebounded strongly in Q1, rising by 2.07 trillion yuan. The need to find higher returns to repay these high-cost structured deposits has also sparked a resurgence of some types of shadow banking assets. The PBOC needs to cut deposit rates to close this arbitrage window, or further declines in money market rates will fuel more speculative financing activities while demand in the real economy remains soft.
