Wednesday 8 April 2009
Bank Lending Binge Continues, But for How Long?
After new bank lending reached over one trillion yuan in both January and February, March also saw more than one trillion yuan in new credit flow out the bank doors. The big banks are still running for the big projects involved in the government’s economic stimulus plan, but a big part of funds lent for bill financing is continuing to flow into the stock market. And a large percentage of the financing is long-term and is boosting banks’ NPL risk.
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Bank Lending Binge Continues, But for How Long?
CSC staff, Shanghai
8 April 2009
After new bank lending reached over one trillion yuan in both January and February, March also saw more than one trillion yuan in new credit flow out the bank doors. The big banks are still running for the big projects involved in the government’s economic stimulus plan, but a big part of funds lent for bill financing is continuing to flow into the stock market. And a large percentage of the financing is long-term and is boosting banks’ NPL risk.
Total lending in the first three months of 2009 reached nearly 4 trillion yuan, meaning 80% of the 5 trillion yuan projected annual credit line will have been distributed in the first quarter of the year. When January’s 1.62 trillion yuan in new lending was released, most domestic economists swore such drastic credit growth was unsustainable. Many bank analysts, however, have come to believe the credit boom, which is helping to heat the economy, may last until the end of the year.
The main reason is that local governments and banks are both working hard to get more projects underway. The central government’s economic stimulus plan is predicated not a little on banks greatly expand their credit scale, and government-related projects, particularly local and national infrastructure construction projects and matching facility construction of subway projects, have banks licking their chops. Seizing this opportunity to develop their local economies, regional and local governments are developing as many project ideas as possible.
To get good projects, banks, facing extremely stiff competition amongst themselves, are having to concoct ever new and creative ways to attract clients. The Industrial and Commercial Bank of China (ICBC), for example, has been very eager to finance a project for Zhejiang Communications Investment (Group) Co. (CICO), the best state-owned enterprise in Zhejiang Province. According to the rules, however, the interest discount it could offer could be no higher than 10%. So ICBC contacted the local pension fund, hoping the two could cooperate in landing this project. Due to various investment limits, a 3% rate of return was satisfactory to the pension fund. ICBC guarantied its 3% rate of return. As a result, ICBC could put up part of the money for the project at a 10% interest discount, while the local pension fund was good for the rest at 3%, and ICBC got the project.
Enlarging credit scale has also been welcomed by enterprises. Worried about tightening credit in the second half of the year, many enterprises prefer to get the money they figure they’ll need in advance, regardless of higher interest rates.
Moreover, with interest rates for bill financing in the past few months lower than those for three-month time deposits, firms seem to be seeing the opportunity for arbitrage. The bill financing percentage rose from 30.5% in December last year to 41.9% in January, and 46.8% in February. An official of the China Banking Regulatory Commission (CBRC) revealed that this number didn’t rise further in March, but still stayed at a high level.
With credit scale constantly rising, worried supervisors are looking for problems lying behind the high credit growth, for instance, about the recent large flows into the stock market originating from the ostensible bill financing funds.
After credit figures for January were released, economists estimated that up to 500-600 billion yuan had flowed into the stock market, stirring complaints that credit funds are not been invested in the real economy but are flowing into bank and enterprise pockets via stock investments. The fairly recently moribund stock market is quite adequately liquid these days.
CBRC is also watching the risks from the increase in banks’ mid- and long-term loans. At present, it has not decided to what extent local governments are able to support project debts, but it has already warned commercial banks that they are not to grant without limit loans to local governments.
This year’s soaring lending has disturbed commercial banks’ normal credit expansion. The current credit growth led by launch of large projects can’t last long, and a demand crunch may emerge in the second half of the year, as private enterprises are unwilling to invest during economic recession.
CBRC is now promoting loans to small and medium enterprises (SMEs), and will require all banks to establish an SME sector. Some favourable policies for taxes and writing off of bad loans and will be launched. Over the long run, large state-owned enterprises are not short of funding, as they have cheaper financing channels, while SMEs normally have a hard time getting bank loans, and now will become a target for lending. Developing SMEs will go a long ways in helping to maintain economic stability and promote employment.
Now China’s macroeconomic and monetary policies are facing crucial choices. Whether the government should continue to boost the economic growth or merely maintain the relative stability is being disputed. Some supervisors believe the government should accelerate currency circulation in the real economy, and clear channels for currency transfer. There is still large room for monetary policy adjustment. The government can continue to expand credit, cut interest rates, and lower deposit reserves. But where does it end?
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