* Weak Dec bank loans reflects drop in bill financing
* But discounted bills not used to finance investment
* Drop shows banks' increased risk appetite
* Surge in undiscounted bills reflects shadow finance
By Gabriel Wildau
SHANGHAI, Jan 10 While weak bank lending figures
in December may prompt worries that China's economic recovery is
faltering, most of the recent decline is due to a fall in
discounted bills, which have little relationship to investment.
In fact, analysts say the lower proportion of bill
discounting in overall lending may signal improving risk
appetite by banks as China's economic outlook improves.
At the same time, a surge in undiscounted bills in recent
months suggests that overall credit demand in the world's
second-largest economy remains strong but is now being satisfied
through off-balance sheet credit.
Net new loans in December totaled 454 billion
yuan ($72.92 billion), well below market expectations of 550
The lending breakdown shows that bill financing loans fell
by 191 billion yuan.
That makes corporate bills the main source of volatility in
the headline total. If outstanding bill financing had merely
been flat, rather than declining, net new lending in December
would have been 643 billion yuan, well above market expectations
of 550 billion yuan.
In fact, bill financing has declined by a total of 518
billion yuan since September, compared to 1.46 trillion in net
new loans in this period.
This trend is a dramatic reversal of the pattern seen in
early 2012, when bill financing accounted for 17 percent of net
new loans in January through August, including 35 percent in
But the recent trend may actually be good news for China's
economic recovery, while the previous rise in bill financing was
likely a symptom of China's economic slowdown in mid-2012.
Discounted bills are short-term loans typically used by
smaller firms to boost cash flow and working capital. All are
less than one year, and many are less than three months. That
means the trend of such loans don't track the trend in
"If banks want to shorten the duration of their credit risk,
they will use bill financing to fill up their loan quotas," said
Ethan Mou, rates strategist at Bank of America-Merrill Lynch in
"If the proportion of bill financing is dropping and the
medium- to long-term new loans are picking up, that's a sign
that loan demand is picking up and banks are now less
risk-averse," he said.
Market watchers have traditionally paid close attention to
monthly new yuan bank loans as a gauge of investment demand.
But in 2011 the People's Bank of China introduced a new data
series called total social financing (TSF) in an effort to
capture a broad range of fundraising channels.
Central bank officials have said recently that they view TSF
as the key metric to gauge the impact of monetary policy.
Just as bill financing explains much of the volatility in
overall bank lending, undiscounted bills - also known as
bankers' acceptances (BAs) - are among the most volatile
components in TSF.
BAs are commonly used around the world as a tool for
settling international trade transactions. But in China they
have also increasingly been used as off-balance-sheet financing
for the domestic economy. The PBOC's decision to include BAs in
TSF was an attempt to better track this channel of shadow
When an exporter receives a letter of credit from an
importer and submits it to his bank, the bank may issue a BA to
the exporter - essentially a promise by the importer's bank to
pay the importer at a future date.
But a BA, which the issuing bank records off-balance-sheet,
need not be issued based on a letter of credit. The bank also
requires the importer to place margin deposits at the bank worth
10-50 percent of the value of the BA.
If the importer wants cash right away, he may redeem the BA
immediately at a discount to its face value. At
that point the discounted bill appears on the discounting bank's
balance sheet as a loan.
PBOC considers undiscounted bills a form of financing
because in China they are commonly used as payment for supplies,
utility bills, or even taxes. In that case, the payee is
essentially extending credit to the payer, since the payee will
not receive cash until the BA matures.
Traditionally, most BAs are discounted, but the ratio has
fallen in recent years.
Banks issued 503 billion yuan in new, undiscounted bills in
the last four months of 2012, while discounted bills declined by
518 billion yuan in the same period. That suggests that banks
merely shifted discounted bills off-balance-sheet.
Regulators have taken repeated steps in recent years to
crack down on deceptive use of BAs, including requiring margin
deposits to be counted towards banks' required reserve ratio and
tightening rules for the endorsement transfer of BAs.
But the surge in undiscounted bills in recent months
suggests the cat-and-mouse game is continuing.
($1 = 6.2262 Chinese yuan)
(Reporting by Gabriel Wildau; Editing by Kim Coghill)