Chinese businesses shun bank loans as economy worsens

China’s banking sector is lending less and less because of the spreading economic slowdown.

China’s biggest banks are expected to fall short of loan targets for the first time in at least seven years as the debilitating economic slowdown chokes demand for credit.

A drop in lending in April and May make it likely that banks’ total new loans for 2012 will come to some US$1.1 trillion, far less than the estimated government goal of US$1.3 trillion. Banks are relying more and more on small and medium enterprises for loan growth after a sharp fall in demand from the biggest state- owned borrowers.

The drying up of loan demand verifies to the severity of China’s economic slowdown. Sources said this could force the government to cut interest rates and expand stimulus measures. The economy is projected to grow at its slowest pace in 13 years this year.

New bank loans last month dropped 33% from March to US$107 billion, well below the US$123 billion median forecast by economists. Lending might decelerate further in May as the four biggest banks that account for about 40% of lending have advanced only US$5.4 billion as of May 20.

Analysts said that failing to meet the annual loan target would mark a turning point for Chinese banks, which have reached or exceeded the central bank’s goal every year that such quotas have been in place since 2006.

Fitch Ratings last week warned that China’s non-performing debt and special-mention loans were vastly understated and banks’ cushions are thinning as deposit growth slows and forbearance reduced loan repayments.