Opinion

The Great Debate

China’s banks, running hard to stand still

August 14, 2009

wei-gu.jpg– Wei Gu is a Reuters columnist. The opinions expressed are her own —

Chinese banks are like enthusiastic runners on an accelerating treadmill. The weakening economy means poor lending decisions are threatening to catch up with them, but the banks are sprinting ahead by expanding their loan books ever faster. They cannot keep this up for ever.

For now things still look fine. China Banking Regulatory Commission (CBRC) this week claimed that Chinese banks were managing credit risk sagely, pointing to record low non-performing loan ratios. Given the massive increase in the number of loans outstanding — up 24 percent since the start of the year — it’s not surprising that the proportion of them that are non-performing at large commercial banks, which accounts for 60 percent of the lending, has declined from 2.4 percent to 1.8 percent in the past six months.

Chinese banks appear to be focusing their lending on regions which have suffered the most in the crisis. The five regions that have shown the largest increase in new loans are the ones that were hit hardest by the downturn, namely coastal cities such as Guangdong, Jiangsu, Zhejiang, and Shandong, plus Beijing. These are also the regions that have experienced among the slowest growth this year. This suggests that loan growth is being driven by official policy rather than the product of bankers seeking the most attractive investment opportunities.

Chinese banks had double-digit NPL ratios before Beijing cleaned them up in preparation for their listing on foreign exchanges. Foreign banks with risk management expertise were brought in, and offered cheap stakes in Chinese institutions to encourage them to share their knowledge. This led to an improvement in lending standards as Chinese banks installed expensive computer databases and formed central credit offices.

It is not clear however how deeply these reforms have been entrenched. The banks remain very decentralized and lending standards are generally lower than their foreign counterparts.

In the past few years, Chinese bankers were restrained by the regulator from going on lending sprees. Banks were given lending quotas to prevent the economy from overheating. This year, with growth the main concern, there were no ceilings.

Chinese banks have clearly now opened the flood gates and are taking on more credit risk. The chief banking regulator Liu Mingkang said at a closed-door meeting in Tianjiin this April that the maximum Chinese banks should lend out a year is 6 trillion yuan ($878 billion), anything above that would be deemed as risky. During the first half alone, they lent out a whopping 7.37 trillion yuan ($1.08 trillion).

The current NPL statistics are irrelevant. The test for Chinese banks will come in the next 2 to 5 years, as the latest wave of lending shows its worth. True, many infrastructure loans seem to have implicit government backing, but less come with strong underlying cashflows. Instead of celebrating the record-low NPLs, the regulator should take it as a worrying sign that Chinese banks are now running hard to stand still.

— At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund —

Comments
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This is precisely the right time for banks to increase lending. Unlike the failed US banking model, Chinese financial firms have correctly predicted that the Asian economies will grow out of the recession this year. Since I live in Asia I can also tell you some things. It is still much more difficult to secure credit in China than the US. The requirements are much more stringent. TO buy a house, someone must be able to put down 50% or more for the equity. In the US just about anyone with a job was able to receive a mortgage regardless of their capacity to repay the loan. This latest “wave” of lending is being used to supplement the Chinese government’s stimulus package. It is quite different than the Obama bank bailout and consequent stimulus package which ended up in the wealthiest hands and allowed elitists to consolidate their power over the US banking industry. There will be subdued inflation risks as the world continues to demand more Chinese Yuan and escape riskier Western currencies like the US Dollar or British Pound. Chinese banks are far more conservative than Western banks. The Asian financial system can handle more risks because it is more robust at this point.

Posted by icrmb | Report as abusive
 

Congratulations Ms. Wei Gu, writer for writing a true story about mis-managed Chinese banking system. Global banking regulatory system may see some changes in the background of G-20 meetings held in Washington and London. China is still a controlled economy; the status of free economy will be the real test for its currency, cheap production based business and export oriented economy.
CA. Rajay Kumar Aggarwal,

Posted by CA. Rajay Kumar Aggarwal | Report as abusive
 

I believe that the real problem is the US privately owned Federal Reserve Corporation is feeling the competition from new Chinese Renminbi bond sales. So we are seeing so much negative hype on reuters. Chinese banks are the best investments in the world financial sector now. In China the government controls the banking system (like the US did before 1913 when the international bankers formed a credit monopoly and usurped that power).Here are the words of Bank of China president Xiao Gang.”The bank governance structure in China has the following advantages:

■ It has ensured the balance check of the incentive and disciplinary mechanism of banking institutions, prevented the management from engaging in excessively risky activities for short-term interests and huge profits, and achieved balance between social responsibilities and business interests, between collective interests and individual interests, between shareholder interests and staff interests, thus favorable for the banking institutions to exert scientific control.

■ It has greatly strengthened the credit standing of financial institutions. State-controlled banks are supported by State credit in an invisible way, which is of immeasurable value to a financial institution, particularly in boosting public confidence amid a financial crisis to maintain the stability of the financial system.

■ It has fostered a distinctive management culture and a prudent decision-making mechanism. State-owned banks pay attention to the competence of the executives and the management of people. The senior management is of sound political and business qualifications. There is a payment ceiling for the management, which is quite different from the Western style of “individual heroism”.”

Posted by jay | Report as abusive
 

It’s inaccurate to blame the slowing of growth on bad-bank loans. An export driven economy will off course be hit hard when recession hits the consumers abroad. It’s just common sense, and considering other nations, I have to insist that Chinese economy still boast the strongest growth. Even though the bank regulatory issues have to be solved, it’s not the biggest reason behind slowing growth.

It also seems that you naturally equate increased lending with irresponsible bad loans. Couldn’t you give at least a little benefit of doubt to Chinese banks and government agencies that monitors them? Just like you mentioned, they have improved standards. And after all that has happened during and before this recession, I can’t believe you still retain the my-bank-better-than-your-bank attitude. I don’t think it’s ridiculous claim to say that this recession is, in large part, caused by the world’s largest financial institutions.

By the way, just nit-picking here: Jiangsu, Zhejiang, and Shandong are not cities, they are provinces. Don’t you think twice about who your audience might be before making these small but still laughable error?

Posted by Jack Sun | Report as abusive
 

We all saw what happened when the American banks folded up. What will America do if China, its principal creditor, collapses?

Posted by Anand Rajadhyaksha | Report as abusive
 

There is no difference between a Chinese Bank Bailout and a US Bank Bailout. They are both funded by a surplus from Chinese Money.
American bank problems have just begun. There are talks of US commercial real estate meltdown. I wonder what is going to happen then.

 

Jack Sun

Do you ever actually read an article before making your own errors? At no point did the author argue that growth is slowing because of bad bank loans.

I think the point is that future growth could be slowed (2-5 years) because of bad bank loans.

P Ngan – I think the Real Estate meltdown you mention already began more than 2 years ago. It was called the subprime crisis.

Posted by Jane | Report as abusive
 

Also Jack Sun

At no point does the author say that Foreign banks are better than Chinese banks. I presume that is what you meant by the supposed “my bank is better than your bank attitude”.

It really is getting tedious this (on many blogs) argument whenever anyone mentions anything bad about China “Well the US does X!!!”

What the US does is logically unconnected to whether a particular event / policy in China is worth of criticism or not (unless of course they are directly linked). I realise that some people find it a little bit difficult to see foreigners criticize them (although to be honest unless you are working in a Chinese bank, then you really shouldn’t feel defensive, as it is nothing personal against you).

Giving the benefit of the doubt is not something we do in finance. Lending out 7 trillion RMB (1/4 of GDP) in 6/7 months, during times when the economy is suffering from falling profits, export contraction, deflation, closures and vast overcapacity MUST NECESSARILY cause an increase in bad loans. As we presume that no Chinese banks will be allowed to fail (ok, well maybe a local one) then ultimately it will be the Chinese govt. (read Chinese tax payer) who has to come to the rescue. The AMCs have STILL not cleared the huge amount of bad loans which were removed from the banks 10 and 5 years ago. (The Ministry of Finance was forced to bail those bonds out as well, and will be paying off the bonds this year and next).

Posted by Jane | Report as abusive
 

Jane – Note note note I said COMMERCIAL Real Estate meltdown. Economy is a global factor. Definitely! faults in systems should be compared. Get used to it

Posted by p ngan | Report as abusive
 

Jane,
to answer your question: “Do you ever actually read an article before making your own errors?” My answer would be Hell yes! And after reading your comment about what the author didn’t argue, I have to ask,do YOU, Jane, know how to read between the lines?

You said “At no point did the author argue that growth is slowing because of bad bank loans.” Well suggesting poor lending decisions somehow slowed economy and will slow economy in the future is the premise the author used to start the this article. Read the intro again.

You also said “At no point does the author say that Foreign banks are better than Chinese banks.” I will just paste these paragraphs here: “Chinese banks had double-digit NPL ratios before Beijing cleaned them up in preparation for their listing on foreign exchanges. Foreign banks with risk management expertise were brought in, and offered cheap stakes in Chinese institutions to encourage them to share their knowledge. This led to an improvement in lending standards as Chinese banks installed expensive computer databases and formed central credit offices.
It is not clear however how deeply these reforms have been entrenched. The banks remain very decentralized and lending standards are generally lower than their foreign counterparts.” If you can’t reach my conclusion after reading these two paragraphs, well, read it again! between the lines.

I didn’t ask for benefit of doubt, it’s there whether you give it or not. In finance the RESULT speaks for all. You can argue Chinese banks have a lot to learn, but you can’t say that it’s broken machine on a broken track that are “running hard just to stand still”.

Finally, I am not just making irrational, defensive comments because someone said something bad about China, that’s childish on a intellectual forum and won’t get you anywhere. So quit assuming, would ya? I presented my idea based on how I understood a piece of article written by someone who called the most important provinces in China, cities. Put yourself in my shoes and imagine making rebuttal with cool-head against someone who started her argument by saying something like: “California, Chicago, Texas, Boston, and Florida are some of the largest cities in US to host great basketball teams…”–just for the sake of argument.

Posted by Jack Sun | Report as abusive
 

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