“The reality is that China’s domestic credit demand is extremely weak.”

Manufacturing is at the heart of China’s attempt to return the country to rapid growth after a real estate crisis dented its outlook, although the strategy risks further worsening trade tensions with the United States and the European Union.

The growth of outstanding medium and long-term loans to the industrial sector has accelerated since 2020, reaching 33% yearon-year in mid-2023.

Real estate loans slowed down sharply during the same period as the property market tumbled.

But Rhodium found much of the increase in industrial loans were driven by banks’ refinancing to local government financing vehicles – companies that borrow on behalf of provinces and cities to fund infrastructure – as well as extended loan repayment for small firms during the pandemic.

Many companies also took cheap bank loans and channelled them into long-term time deposits and investment products to gain a profit.

This explains the disconnect between a surge in headline industrial-loan growth and a slowdown in manufacturing-investment growth from 2022 to 2023, the researchers said.

“Other sources of funding are likely more important drivers of Beijing’s industrial policy push at present, rather than state-owned commercial banks,” they wrote.

China’s top leaders in October called for “more financial resources to be used to facilitate technology innovation and advanced manufacturing” during the Central Financial Work Conference.

In a document published in April, the national financial regulator vowed to lift the proportion of mid and long-term loans to the manufacturing industry in overall credit.