Market News

(Bloomberg) — Jerry Hu, who owns an auto-parts firm in eastern China, was approached in October with a strange request. A loan officer from one of the country’s biggest banks asked him to borrow 5 million yuan ($700,000), deposit the money and repay it next month. The bank even agreed to cover the interest.

“Their managers kept calling me,” said Hu, whose firm in Zhejiang province near Shanghai is a valued client because of its steady cash flow and solid profits. “I didn’t really need a loan, but I still agreed to help.”Known as “quick-lend-and-recover,” the practice is spreading as banks come under unprecedented pressure to hit government-set targets that can’t be met by real demand, according to interviews with almost two dozen bankers. The loans underscore a major challenge facing policymakers as China’s economy slows: They can make funds cheaper and more abundant, but they can’t force people to borrow, spend or invest.

While targets vary from bank to bank, they have been told to lend at least as much as last year, said the bankers, who asked not to be named discussing private directives. Bankers are worried the number of borrowers could shrink even more over the final few months of the year at a time when record low margins and rising bad loans are already putting lenders under strain.

Retail clients are getting similar requests.

Jane, who works for a bank in Zhejiang and requested to be identified only by her first name, was asked by several rival banks to take out a consumer loan and hold the funds for only a few days before repaying. Banks in these cases have also offered to cover the interest, with some loan officers even using their own money to pay for clients such as Jane, so that they can tap them again.

The National Financial Regulatory Administration didn’t immediately respond to request for comment.

Cooking up loan data has drawn scrutiny before, and authorities have vowed to prevent funds from circulating within the banking system instead of flowing to the real economy.

In a government audit report, six state-owned financial institutions were found in 2023 to have issued 516.7 billion yuan in loans just before key assessment periods, only to withdraw them shortly after. Some firms deposited funds with the banks prior to borrowing equivalent amounts, or subsequently parked the loan proceeds back into time deposits with the same banks.

In one recent example, a branch of Bank of Qingdao Co. (3866.HK) was fined 518,300 yuan for inflating deposits and loans via the quick-lend-and-recover practice, according to an October notice from the NFRA.

While authorities were able to engineer a rapid credit expansion through infrastructure spending and real estate development in the past, that’s getting increasingly difficult as China’s property market is in a prolonged downturn and households and companies are opting to pay down debt.

An entrepreneur in Guangdong province — who asked not to be identified — said that when he recently tried to repay around 3 million yuan in loans ahead of schedule, bank staff asked him to delay the repayment by a month to not impact quarterly targets. When he returned the following month, the bank offered cash compensation equivalent to the savings he would have gained from early repayment, provided he kept the loan outstanding.

Regulators have also been pressing lenders to step up credit support for the economy after new yuan lending contracted in July for the first time in two decades. The outstanding amount of loans — excluding those to financial institutions — expanded 6.4% in September from a year ago, the worst reading since data began in 2003.

The structural imbalance between abundant supply and low demand is intensifying competition across the banking system. Despite calls from regulators to avoid excessive competition and price wars, many lenders have continued to slash consumer loan rates this year. Major banks are offering better lending terms or additional incentives — such as more favorable foreign-exchange deals — to lure clients from rival lenders, according to bankers.

Meanwhile, local government financing vehicles, a previous key source of credit demand, have also dried up due to Beijing’s ongoing crackdown on hidden debt in the sector. The number of financing vehicles and their total debt have dropped by 71% and 62%, respectively, over the past two and a half years, according to the central bank.

Bad Outcomes

Local branches of the Ministry of Finance have significantly intensified oversight of financing guarantees provided by state-owned enterprises to financing vehicles over the past few weeks, people familiar with the matter said. That prompted banks to raise lending thresholds for these platforms, further limiting their access to loans, the people said.

The ministry didn’t immediately respond to request for a comment.

In another sign of deteriorating domestic demand, overall investments have so far this year contracted for the first time since 2020. While the country’s economic growth is on track to reach this year’s target of about 5%, many analysts predict the final three months of 2025 will see the slowest performance since Covid lockdowns in 2022.

Bank executives are pondering two outcomes, and both are bad. They can either take on more risk, or fall short of the targets.