The government’s plan for encouraging loans to stimulate the economy is facing resistance from the banking sector.
Wen Xiu, Fang Huilei, Zhang Man and Wang Xiaolu, Caijing 26 December 2008
On the heels of China’s 4 trillion yuan stimulus package to battle the global economic downturn, the State Council recently released a list of financial market incentives called the Financial 9 and, later, a more detailed Financial 30.
The initiatives are designed to encourage bank lending and other financial support for economic development.
But some Chinese banks are apparently balking at Beijing’s agenda. Their attitudes are shaped by uncertainty surrounding the Chinese economy amid the global meltdown. Banks face a tough year ahead, and they’re skittish about loan risks.
“Do you expect banks to lend immediately in response to the government’s call?” one senior banker asked. “We go through a procedure when signing each loan and it is not fast.”
Bankers are puzzled by mixed messages. On one hand, they are partially state-owned and subject to government direction. On the other, as listed entities, they are responsible to shareholders.
Even before the government’s latest decision, bankers were finding ways to please policymakers without letting restrictions imposed by Beijing hurt their business.
Caijing learned that many banks have been meeting government lending targets by boosting low-risk securities trading which, technically, can count as lending. The actual level of bank lending has not grown so far this year compared to 2007.
A China Banking Regulatory Commission (CBRC) official said under condition of anonymity that securities notes currently comprise more than 20 percent of total lending volume in the banking sector.
Moreover, government policymakers and regulators may not always see eye-to-eye. On several occasions recently, CBRC Chairman Liu Mingkang stressed the need for banks watch credit risks.
“Government instructions are not always in line with concerns of regulators,” said a regional banker.
Many banks think the financial crisis won’t bottom out until June. They expect to remain cautious about lending for months to come.
Guo Shikunm, a chief analyst with China Construction Bank, said a government decision to loosen monetary policy does not necessarily mean banks will lower lending standards.
Meanwhile, Chinese banks lack necessary vehicles to deal with bad debts accumulated during slowdowns. The chairman of the provincial Shandong Banking Regulatory Commission, Zhou Zhongming, said although regulators have done a lot of work, they still have a long way to go.
Chinese banks cannot write off non-performing loans as easily as they wish. They are allowed to write off bad debts worth 500,000 yuan or less after trying to collect for two years. But any additional bad debt must be approved by courts.
The bad debt rules were set by authorities who worry that banks might try to dispose of state-owned assets during write-off procedures. Also, the government wants to prevent deliberate write-offs by banks seeking income tax deductions.
Earlier, banking regulators reportedly were negotiating with the Ministry of Finance on a plan to let banks make independent decisions about disposing of bad debt. But the talks apparently hit a dead end.
Provisions in Financial 30 may offer a little relief by relaxing constraints on write-offs related to small- to medium-sized enterprises (SMEs) as well as agriculture projects. At the same time, procedures for tax agency reviews of write-offs may be simplified.
Financial 30 is about 4,600 Chinese characters long and includes special emphasis on broadening financial channels for the private sector, namely by encouraging banks to lend more. It also focuses on SMEs by suggesting innovative ways for banks to lend to enterprises.
But industry experts are guarded about the immediate impact of the new policy.
For example, some have raised red flags over Financial 30’s inclusion of pilot projects for asset securitization, namely through the interbank bond market, and allowing debt trading backed by loans to SMEs as well as agriculture and state construction projects.
A CBRC official told Caijing the success of asset securitization will depend on whether banks are well-equipped with risk control capabilities, including the necessary manpower and technology. In addition, a legal framework for the system is needed.
Thus, despite the government’s intent, the impact of Financial 30 may not be immediate.
“The political stimulus will help a little,” said the regional banker. “But it will hardly change the entire lending landscape for next year.”
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Banks Face Uncertainty over ‘Financial 30’
The government’s plan for encouraging loans to stimulate the economy is facing resistance from the banking sector.
Wen Xiu, Fang Huilei, Zhang Man and Wang Xiaolu, Caijing
26 December 2008
On the heels of China’s 4 trillion yuan stimulus package to battle the global economic downturn, the State Council recently released a list of financial market incentives called the Financial 9 and, later, a more detailed Financial 30.
The initiatives are designed to encourage bank lending and other financial support for economic development.
But some Chinese banks are apparently balking at Beijing’s agenda. Their attitudes are shaped by uncertainty surrounding the Chinese economy amid the global meltdown. Banks face a tough year ahead, and they’re skittish about loan risks.
“Do you expect banks to lend immediately in response to the government’s call?” one senior banker asked. “We go through a procedure when signing each loan and it is not fast.”
Bankers are puzzled by mixed messages. On one hand, they are partially state-owned and subject to government direction. On the other, as listed entities, they are responsible to shareholders.
Even before the government’s latest decision, bankers were finding ways to please policymakers without letting restrictions imposed by Beijing hurt their business.
Caijing learned that many banks have been meeting government lending targets by boosting low-risk securities trading which, technically, can count as lending. The actual level of bank lending has not grown so far this year compared to 2007.
A China Banking Regulatory Commission (CBRC) official said under condition of anonymity that securities notes currently comprise more than 20 percent of total lending volume in the banking sector.
Moreover, government policymakers and regulators may not always see eye-to-eye. On several occasions recently, CBRC Chairman Liu Mingkang stressed the need for banks watch credit risks.
“Government instructions are not always in line with concerns of regulators,” said a regional banker.
Many banks think the financial crisis won’t bottom out until June. They expect to remain cautious about lending for months to come.
Guo Shikunm, a chief analyst with China Construction Bank, said a government decision to loosen monetary policy does not necessarily mean banks will lower lending standards.
Meanwhile, Chinese banks lack necessary vehicles to deal with bad debts accumulated during slowdowns. The chairman of the provincial Shandong Banking Regulatory Commission, Zhou Zhongming, said although regulators have done a lot of work, they still have a long way to go.
Chinese banks cannot write off non-performing loans as easily as they wish. They are allowed to write off bad debts worth 500,000 yuan or less after trying to collect for two years. But any additional bad debt must be approved by courts.
The bad debt rules were set by authorities who worry that banks might try to dispose of state-owned assets during write-off procedures. Also, the government wants to prevent deliberate write-offs by banks seeking income tax deductions.
Earlier, banking regulators reportedly were negotiating with the Ministry of Finance on a plan to let banks make independent decisions about disposing of bad debt. But the talks apparently hit a dead end.
Provisions in Financial 30 may offer a little relief by relaxing constraints on write-offs related to small- to medium-sized enterprises (SMEs) as well as agriculture projects. At the same time, procedures for tax agency reviews of write-offs may be simplified.
Financial 30 is about 4,600 Chinese characters long and includes special emphasis on broadening financial channels for the private sector, namely by encouraging banks to lend more. It also focuses on SMEs by suggesting innovative ways for banks to lend to enterprises.
But industry experts are guarded about the immediate impact of the new policy.
For example, some have raised red flags over Financial 30’s inclusion of pilot projects for asset securitization, namely through the interbank bond market, and allowing debt trading backed by loans to SMEs as well as agriculture and state construction projects.
A CBRC official told Caijing the success of asset securitization will depend on whether banks are well-equipped with risk control capabilities, including the necessary manpower and technology. In addition, a legal framework for the system is needed.
Thus, despite the government’s intent, the impact of Financial 30 may not be immediate.
“The political stimulus will help a little,” said the regional banker. “But it will hardly change the entire lending landscape for next year.”
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