Banks in China are reportedly inflating their loan books in a bid to meet the government’s demand to infuse capital into the economy, Bloomberg has reported. 

As the economic growth in the country slows due to Covid lockdowns and a troubled property market, borrowers are hesitant to take loans. 

To deal with the issue, some government-backed banks in China are offering loans to companies and then allowing them to deposit funds at the same interest rate, the publication said citing executives of six banks.

Other lenders are borrowing from each other via short-term financing agreements, which can be presented as new loans, the executives added. 

Currently, it is not clear how prevalent this practice is. 

The development highlights the uncertainty that businesses and households are facing with some estimates suggesting that the economy will grow at just 3% and youth unemployment reaching 20%. 

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By GlobalData

An eastern China-based electronics supplier told the publication that it was approached by several banks offering loans at record low rates but given the murky economic environment, it had no plans or needs to take a loan.

“We are not considering borrowing because our cash can fully cover our operations and modest growth,” the firm’s CEO was quoted by the publication as saying. 

“The Covid outbreaks and property downturn have had an impact on us.”

The People’s Bank of China has asked banks and financial institutions in the country to extend credit support to areas including small and micro enterprises, and scientific and technological innovation among other fields.

“We must consolidate the foundation of economic recovery and development with a sense of urgency that no time can wait,” the central bank said in a statement. 

Meanwhile, the authorities are also planning to offer up to CNY200bn ($29.3bn) in special loans to help property developers finish stalled housing projects. 

“The banking industry is suffering enormous pressure from the economic slowdown and the sector’s profit growth is likely to weaken,” the publication said citing China Merchant Securities chief bank analyst Liao Zhiming. 

The lenders also face a bigger risk-management challenge from more non-performing loans, he added.