Credit-Crunch in China and All Over Asia

The Institute of International Finance (IIF) has released data that shows that the credit crunch in China is hitting harder than was thought at first and is secondly at the worst level since the global financial crisis landed on everyone’s plate. The IIF began the surveys in 2009 as a result of the financial crisis and the figures show for China that the situation has never been worse than today.

The 50-point level which determines whether credit availability is easing or tightening now shows that we are below that level in China today (currently standing at 45.7 on the index). That’s also the first fall in lending conditions in China for the first time in 18 months.

But, it’s not just China that is suffering from the credit-crunch today. It’s also Latin American countries and emerging economies and Asia in general.

The reasons behind the tightening of availability of loans in these regions? The strain that is being put on lending at the moment is primarily due to three factors:

·         Domestic funding that is deteriorating.

·         High non-performing loans.

·         Declining loan demand from customers.

In comparison with the first quarter of 2013, there has been a drop in local funding conditions and the index for Asia now stand at 45.2, which is the lowest it has been at since 2011. There were only 15% of banks in the first quarter that expressed a tightening of funding conditions. In the second quarter of 2013, that figure stood at over double that (38%).

Asia has an index reading for non-performing loans (loans that are either at default (overdue by 90 days) or nearing default) that stands at below the global average today also. The global average stands at 48.1, but Asia is at four points below that (44). Asia has the biggest increase in the number of non-performing loans that they are dealing with today. A figure that is below the level of 50 means that there are increasing defaults on loans in the region.

Loan demand from businesses and individuals in Asia is also on the down. It fell for the second quarter in a row this year, and that was the first drop that had been experienced also since 2011. Just as an example, in June new property laws in Singapore for example meant that property loans were predicted to fall by 15%. The introduction of the Total Debt Servicing Ratio (TDSR) brought a limit to loan granting by banks there. Home loans have fallen in the second quarter already by 50-60% in some areas of Asia. According to a Central Bank survey in China, Chinese banks saw a fall in the demand for loans in the country. The index fell by 6% to 72.5 from the 77.4-mark in the first quarter this year, according to the People’s Bank of China. The central bank of China also surveyed in the second quarter executives and asked them if they believed that the economy was slowing down. There was an increase in the number that thought it was indeed cooling, from 31.9% to 36.4% of the respondents in the survey.

According to analysts the volatility caused by the US bond market has had repercussions on the emerging markets and the outflows of capital from those markets will continue in the future. But, it is also the lack of liquidity and the excessively high inter-bank lending rates that were experienced in June. The PBOC refused to inject cash as it wanted to control shadow banking at the time and there was an attempt to curb credit growth.

Indiais also having the finger pointed at it in accusatory fashion since the central bank of India has in recent days tried to shore up the rupee, ending up increasing borrowing costs for companies to more than 10% today. Some say that this may wipe out all of the past gains that have taken place thanks to drops in interest rates in India. The Indian economy only expanded by 5% (ending March 31^st). That is the lowest figure for the past ten years.

The rupee has come in for some severe battering over the past few weeks (falling to its lowest ever level of 61.2125 per dollar at the start of July). The rupee is up today by 0.46% (+0.2725 to 59.3150 per dollar). But, perhaps the most stringent measure is the fact that the central bank of India required banks to maintain a daily balance for lender cash reserves at 99% (from 70% on July 27^th). The measures are apparently temporary but they have had an effect on the Indian economy. The government of India wishes to make credit availability and liquidity costly, but states that it is not tightening monetary policy. The credit quality of companies in India is reported to have reached a five-year low today. Borrowing will become costly and in the next year India will also have to repay overseas debts to the tune of $20 billion. Lending will reach an all-time low of the past 4 years according to banks in India due to the record increase in funding costs. That will be worsened by the rupee’s current status against the dollar and other world currencies.

The economies in India and China are slowing down and that’s making the situation worse. This is making risk-aversion even greater and is resulting in nothing more than tight financial conditions and credit-squeezing. The only thing that will help them is increased proof that they have liquidity for there to be a rebound in their economies. That is far from sure to happen right now. Even relaxing regulations in India last week concerning the investment by foreign companies in Indian industries had little effect. In particular, the opening of the retail sector triggered major political opposition to the government’s decisions and it’s that volatility coupled with the fear of corruption and bureaucracy in the country that are putting foreign investors off.

While the economies in Asia are slowing down, there looks like little chance of liquidity improving. We are seeing all-time lows at the present time. Surely, that should be cause for concern both there and elsewhere.