Big banks' lending grinds to halt in first half of May

China's "Big Four" banks made almost no new loans in the first two weeks of May, after a surprise drop in new loans in April, highlighting liquidity strains that have persisted despite the central bank's monetary easing.

Citing an unidentified insider, the China Securities Journal reported that two of the banks saw only minor loan growth of less than 10 billion yuan ($1.59 billion), while new lending actually contracted at the other two. The article didn't say which banks fell into either category.

The "Big Four" - Industrial & Commercial Bank of China Ltd, China Construction Bank Corp, Bank of China Ltd and Agricultural Bank of China Ltd - usually account for 30 percent of new yuan loans each year.

The dismal performance followed an overall drop in new loans last month. Financial institutions in China extended 681.8 billion yuan of loans in April, a sharp fall from 1.01 trillion yuan in March and far below market expectations.

The loan data "show that corporate demand for loans remains too weak to reverse ... With sluggish demand, an interest rate cut, even if an option in the future, is not necessarily an effective tool to ease liquidity," said Zhou Hao, a global market analyst at ANZ China.

Zhao Qingming, senior researcher at CCB, said the sluggish loan growth stems from weak credit demand, the result of slack industrial production.

A marked sign of this situation was electricity consumption in April, which rose just 3.7 percent year-on-year, the slowest in the past 16 months.

The nation posted a larger-than-forecast trade surplus of $18.4 billion in April. But foreign direct investment contracted 0.7 percent from a year earlier to $8.4 billion, the sixth straight monthly fall.

In response to the economic deceleration, the People's Bank of China, the central bank, cut banks' reserve requirement ratio by 0.5 percentage point on Saturday. It was the central bank's third such reduction in six months.

Market participants overwhelmingly expect further reduction in the ratio to add liquidity to the markets.

Chief economist of Bank of Communications Lian Ping forecast one to three cuts this year of 0.5 percentage point each.

Chief economist of Shenyin Wanguo Securities Li Huiyong forecast two cuts this year.

But Zhao said increasing liquidity is not enough to spur borrowing. Demand will rise only when interest rates drop.