Headline: Chinese Banks Use ‘Phantom Loans’ to Meet Quotas as Credit Demand Slumps
Introduction: China’s banking sector is under pressure as lenders allegedly cycle funds in and out of accounts to satisfy lending targets, despite muted borrowing demand in a slowing economy. The tactic, often called “phantom loans,” risks masking weak credit appetite while drawing sharper scrutiny from regulators.
In this quick-lend-and-recover approach, banks extend short-term loans and recall them within weeks, allowing balance sheets to reflect quota compliance without channeling capital into the real economy. Regulators have vowed to clamp down on what they describe as funds merely circulating within the banking system, a pattern previously seen around performance assessment periods. The tighter oversight comes as the Ministry of Finance increases scrutiny of guarantees tied to local government financing vehicles, prompting banks to raise lending thresholds and further constraining access to credit for indebted local entities.
The stress is visible in recent lending data. New yuan loans contracted in July for the first time in two decades, highlighting the depth of the credit slowdown. By September, overall loan growth excluding interbank lending expanded just 6.4% year-on-year—the weakest pace since records began in 2003. Investment has also declined for the first time since 2020, underscoring the broader economic chill that’s dampening demand for bank financing across households, corporates, and local governments.
Key Points: – Banks reportedly use short-term “phantom loans” to meet lending quotas without boosting real economic activity. – Regulators have pledged to crack down on funds circulating within the banking system. – Tighter scrutiny of local government financing vehicle guarantees is pushing banks to raise lending standards. – New yuan lending fell in July for the first time in 20 years, signaling weak credit demand. – September loan growth (ex-financial institutions) rose 6.4% year-on-year, the slowest since 2003. – Fixed investment has declined for the first time since 2020, reflecting broad economic softness.
