Constraints on banks, not demand, behind loan slump

A record RMB2.0trn fall in bank deposits in July, which put pressure on banks’ loan-to-deposit ratios (LDRs), appears to have been the main factor behind last month’s weakness in lending. LDRs are a particular constraint on smaller banks and it was these banks, rather than the big four, that registered the sharpest drop in new loans. (See Chart below.) Deposits usually fall at the start of each quarter as funds that were brought briefly onto banks’ books to meet quarterly regulatory requirements flow back into wealth management products; last month’s issuance of WMPs was unusually strong. Accordingly, last month’s lending data should not be taken as evidence of a sudden weakening in loan demand.