China's banks adopt revolving-door repayment model amid weak credit demand

To meet official lending targets, many Chinese banks are resorting to instant loan tactics where clients take out loans briefly and repay them soon after, masking low credit demand

Across China, banks are quietly trying to pad their balance sheets with loans that appear and vanish within weeks. The sums are real, but the borrowing is not — it is a “quick-lend-and-recover” tactic that lenders, under pressure to meet official lending targets, are using to show healthy credit growth on paper.

 

According to a Bloomberg report, banks across China are increasingly offering short-term loans that are repaid soon, sometimes within a month, to meet lending targets amid a slump in real credit demand.

 

Citing several bankers, the report said that banks have been instructed to ensure lending volumes at least match last year’s levels. However, with households and companies reluctant to take on new debt, some lenders are turning to creative methods to buttress their balance sheets.

 

Why are Chinese banks turning to quick loan tactics? 

Under the new scheme, clients are asked to take out loans, hold the funds briefly, and repay them soon after — sometimes within weeks. In several cases, the banks themselves or even individual loan officers cover the interest costs to lure clients in.

 

What does this say about real borrowing demand in China? 

The method adopted by banks reflects a deeper problem facing Chinese policymakers: while liquidity is ample and borrowing costs are low, credit demand remains subdued. Businesses and households are focused on paying down existing debt instead of taking on more, leaving banks with few genuine borrowers.

 

Data cited by Bloomberg shows that new yuan loans contracted in July — the first such decline in two decades — while total outstanding loans (excluding those to financial institutions) rose just 6.4 per cent year-on-year in September, the slowest rate of growth since records began in 2003.

 

The slowdown coincides with a prolonged property market slump and weak consumer sentiment in China. Many measures taken by the Xi Jinping administration to revive lending through interest rate cuts and credit incentives are yet to yield results, forcing banks to seek artificial ways to meet lending quotas.

 

Adding to the strain, local government financing vehicles (LGFVs), which were once major borrowers, are taking on less debt following Beijing’s crackdown on hidden liabilities. The report noted that both the number of such entities and their total debt have fallen sharply — by 71 per cent and 62 per cent, respectively — over the past two-and-a-half years.

 

Additionally, the Chinese finance ministry has intensified oversight of financing guarantees issued by state-owned enterprises, prompting banks to tighten credit access to these platforms. This further reduces loan demand at a time when lenders are already struggling to meet targets.

 

How are regulators responding to inflated loan data? 

Chinese regulators have previously warned against such manipulations. Bloomberg noted that a government audit last year found six state-owned financial institutions had issued more than 500 billion yuan in loans just before key assessment periods in 2023, only to withdraw them soon after.

 

In October, the National Financial Regulatory Administration (NFRA) fined a branch of Bank of Qingdao Co. more than 500,000 yuan for inflating its deposits and loans through the quick-lend-and-recover method. The NFRA has urged lenders to ensure funds flow into the real economy rather than merely circulating within the banking system.

 

Given the overall economic slowdown and tightening government oversight, many lenders are caught between a rock and a hard place — take on more risky borrowers to hit targets or fall short of quotas and face official scrutiny.

 

With domestic investment contracting for the first time since 2020 and economic growth expected to slow in the final quarter of the year, the creative lending practice underscores the mounting pressure on China’s credit system.