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Defying gravity? Chinese banks respond to stimulus, increase lending

James Seward's picture

InstabilityThere has been a noticeable lack of entries to the East Asia & Pacific finance blog recently, but unfortunately I've been otherwise occupied on a trip in Beijing. It has certainly been a busy time here in China's capital with the National People's Congress (NPC) going on. However, I haven't seen much of it other than the long traffic jams caused by the road closures. The NPC meetings covered some of the domestic economic stimulus plans, but it has not dealt directly with financial sector issues. Maybe it did not need to since the banks here have already responded to the stimulus.

A recent China Daily report had a great graphic that showed the recent boom in lending by the banking sector, which corresponds very nicely to the announcement of the original economic stimulus plan. As I highlighted in a prior blog post, the $586 billion economic stimulus plan announced in November was only 30 percent funded from the central government, and the expectation was that much of the rest was to come from state-owned banks. Well, it seems they have delivered with gusto!

The RMB 2.67 trillion ($393 billion) in bank lending in the past two months amounts to over half of the Government's credit target of RMB 5 trillion ($735 billion) for all of 2009. This amounts to a quadrupling of new lending from a year ago. China now seems to be unique in the world – most other governments are doing everything they can to encourage banks to lend again and it seems that the Chinese authorities will actually have to try to put on the brakes to new lending!

Although the financial performance of the banks in China has been relatively strong in the past few years and recent announcements by the supervisory authorities indicate that performance actually improved in 2008, as I warned in August on the blog, there is generally a lag before corporate and real sector deterioration hits the balance sheets of banks. This is particularly true in an environment where the regulators have allowed for a degree of flexibility in dealing with troubled bank borrowers. In China, a January announcement by the banking regulator stated that "if some enterprises are facing temporary challenges due to financial crisis, banks could think of rescheduling the loans for them."

The worry is that rapid increase in new lending at a time of economic distress may point to a future accumulation of non-performing loans (NPLs) in the banks in China. Recent analysis by Fitch Ratings indicated that NPLs would rise and bad debt write-offs would be inevitable and would take "significantly longer than expected" to show up and Fitch had warned earlier about losses in Chinese banks. What is interesting is that the bankers themselves are very pessimistic about the economic outlook, but continue to lend at a furious pace. A recent survey of bankers in China by the central bank indicates there is dropping confidence in the economic and monetary conditions. This sentiment seems logical given that the economic statistics seem to be worsening, with a 25.7 percent drop in exports in February from a year earlier, causing 20,000 small to mid-sized companies in the Guangdong Province to close since October.

Chinese banks seem to be defying gravity, so what does this mean? The truth is that it's hard to know and probably no one really knows with any accuracy what's next. If the predictions for China's economic growth (8 percent this year) hold true, which the Government strongly believes, and more fiscal resources are used to stimulus the economy, then maybe there will not be banking problems. The banking regulator has expressed clear concern regarding loan quality and risk management has indeed improved generally in the banking system. However, increased vigilance is required, now more than ever, to make sure that even if the banks can't actually defy gravity, they will not fall fast and hard to the ground!

Comments

Submitted by A. Roubaix on
The looming question is to what extent will the government stimulus program and this response from state-owned banks help to equilibrate the economy ? It does not seem very likely the Chinese economy will be jump-started by this stimulus because the exports - which plunged last month by ca. 1/4 from a year ago ( after a January drop of ca. 1/5 ) - are more dependent on foreign demand than domestic credit at this time, and there is no indication such demand will increase in the short term ( and perhaps even longer ) in a significant manner. This may very well lead to the alternative of switching to higher domestic consumption levels to keep the economy going. Whether that is possible to accomplish successfully in a country with an extremely unequal +disposable+ income distribution among its inhabitants remains to be seen.

Submitted by Dim Sums on
China's problem is shrinking demand--plunging exports and weak domestic consumption. Pumping more credit into companies to expand supply even more will only exacerbate the problem. Are you taking the CBRC's report that the nonperforming loan ratio went down last year at face value? Others have shown that this decline is due to the small mountain of NPLs being taken off the books of the Agricultural Bank of China (and dumped into an asset management corporation holding pen) to get it ready for stockmarket listing. Interestingly, the NPLs of foreign banks (much lower than domestic banks) went up last year.

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