The Chinese government is pressuring banks into boosting their lending to revive the economy. Such arm-twisting had disastrous effects on the lenders in the past, but it may be different this time.
After similar lending sprees in the 1990s and early this decade, many of the hastily granted bank loans went bad and China was saddled with excess capacity in industries such as steel, cement, electrical appliances and bicycles.
Economists are hoping more commercially minded management at the banks and financial market expansion in the past few years will help avoid another such debacle.
Banks are also in better shape now, with their overall non-performing loan ratio more than halved at the end of last year from 2007.
“Typically, banks see non-performing loans creep up for two or three years after a lending spree, and too much industrial capacity becomes a long-term problem,” said China Merchants Bank economist Liu Dongliang.
“But things have changed a lot in China, particularly after major banking reforms this decade. So the situation will not be as dangerous as it was in the 1990s or 2003.”
After faltering late last year as the economy slumped, bank lending shot up in December and last month. New loans surged to a record 1.6 trillion yuan (HK$1.81 trillion) last month, equal to nearly 33 per cent of all new lending last year, an industry source said.
The leap in lending is a key factor behind hopes economic growth will bottom out in the next few months. Such hopes have pushed the benchmark Shanghai Composite Index up 24 per cent this year.
But mainland banks are not lending for purely commercial reasons; they are responding to pressure from Beijing to support an economic stimulus plan that envisages 4 trillion yuan of spending on infrastructure, industry and other projects.
“Banks must do a good job of balancing their roles in boosting economic growth with that of guarding themselves against risks. They should not be blindly reluctant to lend during an economic downturn,” the State Council said in December.
Banks’ non-performing loans soared above 35 per cent of total loans in the mid-1990s after Beijing ordered them to boost their lending as an economic stimulus measure. It again ordered more lending during the Sars epidemic of 2003.
This time, banks are starting from a stronger position. The overall non-performing loan ratio of mainland banks was only 2.45 per cent at the end of last year, down 3.71 percentage points from a year earlier, the regulator said.
Meanwhile, the listing of major banks on the domestic stock market over the past three years has caused them to undertake internal reforms and boost management controls.
“The commercialisation of the banking sector means the days when the bulk of bank lending was ordered by the government are gone,” said Bank of China analyst Dong Dezhi.
“Undoubtedly, banks still heed government appeals, but they do it with a lot of attention to commercial considerations, which [greatly] reduces the risks we saw in the past.”
Also, the development of the country’s financial markets over the last few years may be helping to spread the risk in bank lending.
Industrial and Commercial Bank of China said it made 252 billion yuan of new loans last month, but only 117 billion yuan was in direct loans to firms; 135 billion yuan was through the booming market for short-term, discounted commercial paper.
Even so, bad debt may already be rising; several senior Chinese bank executives revealed the ratio of defaults on their loans had risen considerably from a few months ago, said Thomas Deng, the managing director of Goldman Sachs Asia-Pacific investment research. Stock investors are worried, as bank shares have underperformed the market’s rally. ICBC’s Shanghai-listed shares have risen only 11 per cent since the start of this year.
More commercially minded banks and the government’s new emphasis on developing the rural hinterland to reduce social unrest as millions of migrant workers are laid off during the economic slump may limit industrial overcapacity created by the surge in lending.
But the danger remains that local government officials and local bank branch managers could plough money into the same kind of low-grade factory space that proved redundant in the past.
One measure of China’s industrial overcapacity, its merchandise trade surplus, suggests the problem is already serious. The surplus ballooned to a record US$40.1 billion in November and was only marginally lower than in December.
“The key is all concerned parties - authorities and banks - must keep the risks in mind,” First Capital Securities economist Wang Haoyu said.
1 comment:
Banks in better shape for new lending spree
Business-minded managers may help avert pitfalls
Reuters in Shanghai
12 February 2009
The Chinese government is pressuring banks into boosting their lending to revive the economy. Such arm-twisting had disastrous effects on the lenders in the past, but it may be different this time.
After similar lending sprees in the 1990s and early this decade, many of the hastily granted bank loans went bad and China was saddled with excess capacity in industries such as steel, cement, electrical appliances and bicycles.
Economists are hoping more commercially minded management at the banks and financial market expansion in the past few years will help avoid another such debacle.
Banks are also in better shape now, with their overall non-performing loan ratio more than halved at the end of last year from 2007.
“Typically, banks see non-performing loans creep up for two or three years after a lending spree, and too much industrial capacity becomes a long-term problem,” said China Merchants Bank economist Liu Dongliang.
“But things have changed a lot in China, particularly after major banking reforms this decade. So the situation will not be as dangerous as it was in the 1990s or 2003.”
After faltering late last year as the economy slumped, bank lending shot up in December and last month. New loans surged to a record 1.6 trillion yuan (HK$1.81 trillion) last month, equal to nearly 33 per cent of all new lending last year, an industry source said.
The leap in lending is a key factor behind hopes economic growth will bottom out in the next few months. Such hopes have pushed the benchmark Shanghai Composite Index up 24 per cent this year.
But mainland banks are not lending for purely commercial reasons; they are responding to pressure from Beijing to support an economic stimulus plan that envisages 4 trillion yuan of spending on infrastructure, industry and other projects.
“Banks must do a good job of balancing their roles in boosting economic growth with that of guarding themselves against risks. They should not be blindly reluctant to lend during an economic downturn,” the State Council said in December.
Banks’ non-performing loans soared above 35 per cent of total loans in the mid-1990s after Beijing ordered them to boost their lending as an economic stimulus measure. It again ordered more lending during the Sars epidemic of 2003.
This time, banks are starting from a stronger position. The overall non-performing loan ratio of mainland banks was only 2.45 per cent at the end of last year, down 3.71 percentage points from a year earlier, the regulator said.
Meanwhile, the listing of major banks on the domestic stock market over the past three years has caused them to undertake internal reforms and boost management controls.
“The commercialisation of the banking sector means the days when the bulk of bank lending was ordered by the government are gone,” said Bank of China analyst Dong Dezhi.
“Undoubtedly, banks still heed government appeals, but they do it with a lot of attention to commercial considerations, which [greatly] reduces the risks we saw in the past.”
Also, the development of the country’s financial markets over the last few years may be helping to spread the risk in bank lending.
Industrial and Commercial Bank of China said it made 252 billion yuan of new loans last month, but only 117 billion yuan was in direct loans to firms; 135 billion yuan was through the booming market for short-term, discounted commercial paper.
Even so, bad debt may already be rising; several senior Chinese bank executives revealed the ratio of defaults on their loans had risen considerably from a few months ago, said Thomas Deng, the managing director of Goldman Sachs Asia-Pacific investment research. Stock investors are worried, as bank shares have underperformed the market’s rally. ICBC’s Shanghai-listed shares have risen only 11 per cent since the start of this year.
More commercially minded banks and the government’s new emphasis on developing the rural hinterland to reduce social unrest as millions of migrant workers are laid off during the economic slump may limit industrial overcapacity created by the surge in lending.
But the danger remains that local government officials and local bank branch managers could plough money into the same kind of low-grade factory space that proved redundant in the past.
One measure of China’s industrial overcapacity, its merchandise trade surplus, suggests the problem is already serious. The surplus ballooned to a record US$40.1 billion in November and was only marginally lower than in December.
“The key is all concerned parties - authorities and banks - must keep the risks in mind,” First Capital Securities economist Wang Haoyu said.
Post a Comment