The Chinese banking industry's net interest margin has dropped to a historical low, and loans have begun to contract.

The net interest margin of the Chinese banking industry has fallen to around 1.4%, a historic low, narrowing by nearly half compared to around 2012. Banks are facing diminishing room to earn interest income from loans and bonds.

Meanwhile, the willingness of businesses and consumers to borrow money has not seen a significant recovery.

In July, net new loans in renminbi decreased by more than 340 billion yuan, marking the largest single-month drop on record. Although monthly data can be seasonally affected, the negative net loan growth at least indicates that there are not many willing to increase their liabilities right now.

For businesses, lower interest rates simply mean cheaper borrowing; the ability to make a profit is what's most important. If there aren’t enough orders, expanding production won’t yield returns, and even if loan rates continue to decline, businesses will not actively increase liabilities just because money is cheaper.

The same goes for consumers. While declining mortgage rates can indeed reduce interest expenses, if there is not enough confidence in income growth, the willingness to buy homes and increase consumption will not return immediately.

The current market focus on China's credit pulse is also at a very low level. This indicator mainly looks at whether new financing relative to the size of the economy is accelerating or slowing down; the lower the value, the weaker the contribution of new credit to investment and consumption.

This could also impact markets outside of China. If businesses reduce expansion and equipment purchases, the demand for raw materials and imported goods will also decline, ultimately affecting bulk commodities, global manufacturing, and some countries that export to China.

China is currently injecting about 360 billion yuan of capital into eight large banks and insurance institutions in hopes of enhancing these financial institutions' ability to continue lending and investing.

This capital increase can improve the capital situation of financial institutions, enhancing banks' capacity to continue lending. However, the real determinant of whether credit can grow again still hinges on the borrowing willingness of businesses and consumers. If business orders do not improve and household income expectations do not rebound, even if banks have more funds to lend, the demand for loans may not return immediately.

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