Pressured by policymakers to support GDP growth by writing loans, China’s market-oriented bankers are walking the line.
Li Tao and Wen Xiu, Caijing 4 February 2009
How can China’s well-capitalized banking sector reinvigorate the nation’s Main Street economy as well as encourage industrial modernization, but without wasting available credit on bad loans?
This is a key question confronting bank regulators and policymakers as Chinese commercial banks sail into the headwinds of the economic downturn in 2009.
Banks have already introduced foreign investors, completed share segmentation reform and launched IPOs in recent years. Now, they’re working on credit policy – but with government involvement.
The central bank and China Banking Regulatory Commission (CBRC) told commercial bankers at a window guidance meeting late last year that their loan activity should be in synch with a state objective to ensure 8 percent GDP growth in 2009.
Statistics indicate the banking sector has become more market-oriented in recent years. Banks have more control over credit decisions than in the past. The limited impact of government macroeconomic measures on loan amounts and targets became clear after a tight credit policy in place since 2007 failed to dampen loan growth.
But now, as policymakers urge more lending, the ability of banks to control asset allocation will be tested in 2009. Bankers also have to consider that easy credit during the current economic downturn can lead to loan defaults in the future.
Savings accounts and lending have been building blocks for the Chinese banking sector. This characteristic was apparent in 2008 when, according to the People’s Bank of China, China’s central bank, total lending increased by 4.9 trillion yuan – far above the original early-year goal of 3.6 trillion yuan, and topping even the later revised goal of 4.6 trillion yuan.
Caijing learned that Bank of China, ICBC and China Construction Bank increased their respective lending last year by 280 billion yuan, 345 billion yuan and 350 billion yuan. Lending by all banks rose 1.33 trillion yuan in the first quarter 2008 compared with the same period 2007, 1.12 trillion yuan in the second quarter and 1.03 trillion yuan in the third quarter. Credit growth peaked in the fourth quarter, rising 1.43 trillion yuan.
On the surface, the fourth quarter increase appeared to break a common industry practice to restrict bank lending at the end of most years. It seemed lending rose as a result of a relaxed credit policy.
But an analysis of the lending structure paints another picture, indicating that certain securities trading was calculated as loan activity.
Caijing learned that many banks met government lending targets by boosting low-risk securities trading which, technically, can count as lending. Actually, Zhou Zhongming, the head of Shandong banking authority, said bankers had trouble finding good credit projects in the fourth quarter 2008.
The number of newly issued notes comprised only 44 percent of the total bank credit in 2008. Medium-term loans comprised the largest group, topping 210 billion yuan. Banks wrote 160 billion yuan in long-term and 55.8 billion yuan in short-term loans as well.
Zhu Min, vice president of the Bank of China, said credit lending in China is now following a “V” pattern, with activity sinking since the end of 2008. But he said the bottom is not far off.
Banks are currently bracing for defaults. Industry analysts say non-performing loans will rise in coming months because asset quality is likely to decline in the manufacturing and real estate industries. The retail sector is also seeing signs of a slowdown.
But industry experts think a bounce-back will likely begin in mid-2009 as the economy starts feeling the impact of the Chinese government’s 4 trillion yuan stimulus package, which will include major infrastructure investments.
Zhu predicted the slowdown in China’s GDP felt in the fourth quarter 2008 would continue through the first quarter 2009.
A commercial bank source said banks are currently pressured by profit targets, even though they have a lot of money to lend. Thus, at least in the first half of 2009, banks may see a repeat of the conditions the prevailed between 1998 and 2002 when monetary policy was loose but credit was tight.
Zhou predicted lending growth will focus on major infrastructure projects in the first half of 2009. Other sectors have limited needs for borrowing. In terms of sectors, the export and real estate industries will need fewer loans, while steel and cement industries are expected to borrow more in connection with infrastructure projects.
What’s worth noting, however, is that a lot of the upcoming infrastructure projects will be financed with medium- to long-term loans. So if domestic consumption fails to match infrastructure growth, some of these investments may sour, saddling banks with non-performing loans.
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Bank: Slowdown Tests Credit Control
Pressured by policymakers to support GDP growth by writing loans, China’s market-oriented bankers are walking the line.
Li Tao and Wen Xiu, Caijing
4 February 2009
How can China’s well-capitalized banking sector reinvigorate the nation’s Main Street economy as well as encourage industrial modernization, but without wasting available credit on bad loans?
This is a key question confronting bank regulators and policymakers as Chinese commercial banks sail into the headwinds of the economic downturn in 2009.
Banks have already introduced foreign investors, completed share segmentation reform and launched IPOs in recent years. Now, they’re working on credit policy – but with government involvement.
The central bank and China Banking Regulatory Commission (CBRC) told commercial bankers at a window guidance meeting late last year that their loan activity should be in synch with a state objective to ensure 8 percent GDP growth in 2009.
Statistics indicate the banking sector has become more market-oriented in recent years. Banks have more control over credit decisions than in the past. The limited impact of government macroeconomic measures on loan amounts and targets became clear after a tight credit policy in place since 2007 failed to dampen loan growth.
But now, as policymakers urge more lending, the ability of banks to control asset allocation will be tested in 2009. Bankers also have to consider that easy credit during the current economic downturn can lead to loan defaults in the future.
Savings accounts and lending have been building blocks for the Chinese banking sector. This characteristic was apparent in 2008 when, according to the People’s Bank of China, China’s central bank, total lending increased by 4.9 trillion yuan – far above the original early-year goal of 3.6 trillion yuan, and topping even the later revised goal of 4.6 trillion yuan.
Caijing learned that Bank of China, ICBC and China Construction Bank increased their respective lending last year by 280 billion yuan, 345 billion yuan and 350 billion yuan. Lending by all banks rose 1.33 trillion yuan in the first quarter 2008 compared with the same period 2007, 1.12 trillion yuan in the second quarter and 1.03 trillion yuan in the third quarter. Credit growth peaked in the fourth quarter, rising 1.43 trillion yuan.
On the surface, the fourth quarter increase appeared to break a common industry practice to restrict bank lending at the end of most years. It seemed lending rose as a result of a relaxed credit policy.
But an analysis of the lending structure paints another picture, indicating that certain securities trading was calculated as loan activity.
Caijing learned that many banks met government lending targets by boosting low-risk securities trading which, technically, can count as lending. Actually, Zhou Zhongming, the head of Shandong banking authority, said bankers had trouble finding good credit projects in the fourth quarter 2008.
The number of newly issued notes comprised only 44 percent of the total bank credit in 2008. Medium-term loans comprised the largest group, topping 210 billion yuan. Banks wrote 160 billion yuan in long-term and 55.8 billion yuan in short-term loans as well.
Zhu Min, vice president of the Bank of China, said credit lending in China is now following a “V” pattern, with activity sinking since the end of 2008. But he said the bottom is not far off.
Banks are currently bracing for defaults. Industry analysts say non-performing loans will rise in coming months because asset quality is likely to decline in the manufacturing and real estate industries. The retail sector is also seeing signs of a slowdown.
But industry experts think a bounce-back will likely begin in mid-2009 as the economy starts feeling the impact of the Chinese government’s 4 trillion yuan stimulus package, which will include major infrastructure investments.
Zhu predicted the slowdown in China’s GDP felt in the fourth quarter 2008 would continue through the first quarter 2009.
A commercial bank source said banks are currently pressured by profit targets, even though they have a lot of money to lend. Thus, at least in the first half of 2009, banks may see a repeat of the conditions the prevailed between 1998 and 2002 when monetary policy was loose but credit was tight.
Zhou predicted lending growth will focus on major infrastructure projects in the first half of 2009. Other sectors have limited needs for borrowing. In terms of sectors, the export and real estate industries will need fewer loans, while steel and cement industries are expected to borrow more in connection with infrastructure projects.
What’s worth noting, however, is that a lot of the upcoming infrastructure projects will be financed with medium- to long-term loans. So if domestic consumption fails to match infrastructure growth, some of these investments may sour, saddling banks with non-performing loans.
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