According to Bloomberg Business, Jerry Hu who owns an auto-parts firm in Zhejiang province was approached in October by a loan officer from one of China’s biggest banks. The bank asked him to borrow 5 million yuan ($700,000), deposit the money, and repay it the next month. The bank even agreed to cover the interest on this phantom loan. Hu didn’t need the loan but agreed to help the bank meet its lending targets. This practice is becoming widespread as Chinese banks struggle to find real borrowers in a slowing economy. The situation reveals how financial institutions are creating artificial demand to hit government-mandated lending goals.
Bank Pressure Tactics
Here’s the thing – this isn’t just isolated cases. Banks are systematically pressuring their most reliable clients to take money they don’t need. Think about it: they’re calling profitable businesses with steady cash flow and basically begging them to take loans. The managers keep calling, the interest gets covered, and everyone pretends this is normal banking. But what happens when even your best customers don’t actually need loans? That tells you everything about the real state of demand in the economy.
Economic Reality Check
So why is this happening? China‘s economy is slowing down, and traditional drivers like manufacturing and exports are facing headwinds. Banks have lending targets to meet, but there aren’t enough creditworthy businesses actually wanting to borrow. It’s a classic case of supply chasing non-existent demand. The scary part? This creates a phantom economy where official lending numbers look healthy while the real economy struggles. When even industrial firms that would normally be expanding like those using industrial panel PCs from leading suppliers aren’t borrowing, you know something’s fundamentally wrong.
Systemic Risks
Now, this isn’t just about hitting quarterly targets. There are real systemic risks here. Banks are essentially creating fake assets on their balance sheets. They’re reporting loans that serve no economic purpose beyond meeting quotas. And when you combine this with China’s property crisis and local government debt issues, you’ve got a perfect storm. The financial system is papering over real problems with accounting tricks. How long can this continue before someone has to acknowledge the emperor has no clothes?
What Comes Next
Basically, we’re watching a slow-motion train wreck. Either the economy picks up and real loan demand returns, or these practices become even more desperate. The problem is that artificial lending distorts market signals and prevents necessary adjustments. Banks should be tightening standards during downturns, not inventing reasons to lend. I think we’re seeing the limits of China’s state-directed banking model. When the music stops, someone’s going to be left holding a lot of worthless paper.
