Chinese Banks Increasingly Lending to Manufacturing Companies, as Real Estate Sector Slows
China’s banking system has long been criticized for its reluctance to provide loans to non-state-owned enterprises. This trend has been exacerbated the preference of state-owned banks to lend to fellow state-owned enterprises. Additionally, the local system for evaluating creditworthiness is still evolving. Despite improvements in financing conditions for non-state-owned enterprises, the banking industry continues to adhere to policy directives.
In response to Beijing’s crackdown on high debt levels in the real estate sector, banks and other financial institutions have significantly reduced lending to real estate developers. This shift coincides with China’s recent emphasis on advanced manufacturing, which involves the production of high-value goods rather than lower-cost items. According to the People’s Bank of China, loans to manufacturing companies have increased 38% compared to the previous year as of the end of September, outpacing overall loan growth.
To alleviate pressures on the slumping property sector, the Chinese government has been trying to stimulate investment in manufacturing. Data from August demonstrated an uptick in investment in this sector, and industrial production also showed better-than-expected growth. However, analysts are increasingly recognizing that the days of high-growth in real estate are over, which could further impact the economy in the near future.
There is an ongoing debate among economists about whether China can escape the so-called middle income trap, wherein a country struggles to transition from a low-wage economy to a more developed one. Louise Loo, Lead Economist at Oxford Economics, suggests that China’s shift towards higher-value manufacturing, greener and high-tech investments, and improvements in its education system could be prerequisites for surpassing this trap. However, despite these shifts, the slowdown in China’s growth, primarily due to the real estate sector, is likely to continue. Oxford Economics predicts a slowdown to 4.4% in 2024 and 4.0% in 2025.
Analysts, such as Brian Tycangco from Stansberry Research, express limited optimism regarding the current state of the Chinese economy. Beijing’s efforts to support the economy are seen as preventing further decline rather than driving substantial improvement. Concerns about China’s economic performance are likely to intensify as the country prepares to release its third-quarter GDP, retail sales, industrial production, and fixed asset investment figures on October 18.
Despite these challenges, there are opportunities for investment in emerging sectors of China’s economy. HSBC analysts point out that certain stocks may be oversold, particularly in the advanced manufacturing trend. Three companies, Sungrow Power, Midea, and Yonyou, have been highlighted for their integration of automation, artificial intelligence, and management systems for manufacturing. HSBC has provided positive price targets for these companies, suggesting potential gains ranging from 27% to nearly 80%.
According to Wind Information, a leading financial database in China, the “Fourth Industrial Revolution Index” of mainland China-listed stocks has increased over 20% this year, indicating positive market performance in advanced manufacturing.
Overall, while challenges persist in the Chinese banking and real estate sectors, there are promising opportunities for growth and investment in advanced manufacturing and other emerging industries.