As we transition into 2024, the economic landscape is being shaped by a variety of factors influencing both the lending and deposit sectors of bankingWhile overall loan interest rates are on the decline, banks have been continually reducing deposit interest ratesThis adjustment aims to alleviate the pressure on banks' interest margins, which have been significantly affected by a combination of market forces and a high base of deposits from the previous yearSmall and medium-sized banks, in particular, are facing increased challenges in attracting deposits, especially when compared to the relatively abundant deposits recorded in 2023. The expectation is that we will witness a deceleration in deposit growth for banks across the board in 2024.

On the one hand, underlying demand for credit appears to be robust despite these pressuresThe external economic demand remains favorable, with positive feedback reflecting recent performances in foreign tradeBanco de China has reported that early 2024 showed a marked improvement in exports, outpacing the same period from the previous yearSpecifically, there has been an uptick in exports to the United States, as well as sustained high growth rates in exports to Southeast Asia, the Middle East, and RussiaMoreover, the product categories experiencing growth reflect an evolving consumer preference—high-end goods such as fitness equipment and outdoor gear are on one end of the spectrum, while lower-priced consumables also retain their share of the market amidst a broader trend toward lower spending in some consumer demographics.

This sentiment is echoed in recently released trade data, which indicates a resurgence in exportsIn February, China’s total exports saw a year-on-year growth rate of 7.1%, a noteworthy recovery from the sluggish performance experienced throughout much of 2023. Furthermore, exports to the United States specifically rebounded to a growth rate of 5%, signifying the importance of the U.S. market in China’s export strategy moving forward, even as growth in exports to the EU remains flat.

While external demand remains solid, internal market conditions show more complexity

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Key sectors such as real estate and traditional manufacturing are encountering significant challenges, characterized by an overall lack of demandIn contrast, emerging industries within the manufacturing sector—particularly those tied to technological advancements—are thrivingThe government’s focus on fostering high-tech industries has proven prescient, with the fixed asset investment in high-tech manufacturing growing consistently faster than the broader manufacturing sector.

Insights from engagements with various banks suggest that the structural challenges within the domestic real estate sectors are still notableAlthough there are signs of improvement in the turnaround of real estate projects, observers urge cautionThey assert that improvements correlate with new policy measures designed to streamline financing for real estate venturesFor instance, major cities are urged to establish financing coordination mechanisms to bolster project development, which should enhance the funding landscape for projects that previously struggled under rigorous financial constraints.

This interplay of demand and supply dynamics is critical for elucidating the prospects for household and corporate creditBanks are beginning to see a loosening grip on lending to the real estate sector, with historical but necessary caution applied when engaging with the housing marketBy the end of February 2024, national efforts to elevate the financing mechanisms for the real estate sector resulted in a substantial number of projects being expedited, although the actual level of consumer demand remains to be fully realized.

Further complicating matters is the fluctuating environment of loan pricingSince the beginning of the year, interest rates on new loans are decreasing overall, yet many banks are adopting lower rates to remain competitive within a fiercely contested consumer lending market

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