Friday, 16 January 2009
How the West must wish its banks were as seemingly pliant as those in China
No such problem in China, where the top banks remain majority or wholly state-owned. Beijing’s large fiscal stimulus package needs bank lending support, and it is getting it. But this support is going to come at a cost – namely, in an increase in nonperforming loans.
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How the West must wish its banks were as seemingly pliant as those in China
Even as U.S. and European governments have ploughed money into these banks, getting them to start lending again isn’t proving easy.
No such problem in China, where the top banks remain majority or wholly state-owned. Beijing’s large fiscal stimulus package needs bank lending support, and it is getting it. But this support is going to come at a cost – namely, in an increase in nonperforming loans.
The year-to-year loan growth rate in China in December was 19%, up from 16% in November. Overall loan growth last year is likely to have risen more than nominal gross domestic product for the first time since 2003.
From a macroeconomic point of view, this releveraging is a positive, supporting government efforts to offset China’s slowing exports and property market.
But there is merit to the risk aversion among Western banks, too. Increased lending into a slowdown will lead to a rise in nonperforming loans – doubly dangerous at a time when banks’ net interest margins are narrowing thanks to interest-rate cuts.
Allaying concerns for now is the likelihood that most of the extra lending is going into projects with government support or to state-owned enterprises. Also comforting is that most of the big banks are entering this period with low levels of bad loans.
But pressure to keep the loans flowing even as the economy slows means bad loans on the books could increase quickly. Citi Investment Research suggests the credit multiplier -- the ratio of loan expansion to nominal GDP growth -- could rise above two times this year, a level last seen in the late 1990s.
Such a high level would mean banks were expanding credit too fast for the economy to support it. The last time that happened, about six years ago, Beijing ended up recapitalizing the banks by buying up their bad debts.
Much seems to hinge on how much Chinese banks have truly changed since then. More independent bank management, with greater risk-monitoring capability, should be able to resist a risky ballooning of credit beyond the current rise.
The evidence so far suggests Beijing’s call to duty is going to prove a stronger force.
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