December 24,2008

Banks' Lending Reluctance Undermines Stimulus Plan

By Ma Wenluo

One month after the central government’s launch of its 4 trillion yuan economic stimulation package in October, figures from the People’s Bank of China (PBoC), China’s central bank, show that in November the country’s banks?RMB loan balance dropped by 260 billion yuan over the previous month, an indication that Beijing’s ambitious plan is being undermined by the banks?reluctance to lend. Diverse interests of all the economic players are weakening the government’s efforts and loosened monetary policy is unlikely to be effectively transferred to the real economy.

The banks are being warned, as the State Council has mandated that commercial banks "deal correctly" with the relation between promotion of economic growth and prevention of financial risk, i.e. avoid blindly cutting loans.

This may, however be useless, as banks?own interests are not necessarily consistent with the country’s overall interest. China’s commercial banks are no longer pure state-owned banks under the control of the government, but commercial banks serving the market. Even China Development Bank, China’s policy bank, has become the commercialized China Development Bank Corporation, and completed its transformation the day after the State Council warned the other commercial banks.

Three of China’s four large state-owned banks, with China Agricultural Bank as the exception, have become diversified stock companies. Shareholders of these banks include Goldman Sachs, Bank of America, HSBC, The Royal Bank of Scotland, and The International Finance Corporation, and their demands must be considered, even while following the government’s instruction. The management of these banks do not believe that once bad loans occur the government will bail them out as it did ten years ago, for they are no long the government’s children. After the Asian financial crisis in 1997-98, the government also increased investment in infrastructure construction and overloaded the bad side of banks?loan books, but the banks were all state-owned then. The government then injected $60 billion in total into the Bank of China, China Construction Bank, and Industrial and Commercial Bank.

With the help of foreign shareholders, Chinese commercial banks reinforced risk management after going public. During the present downturn with its already growing risk of NPLs, the government is asking banks to increase loans to prop up firms in difficulty, but meanwhile their boards require management to avoid risk, creating a dilemma. According to figures from Dongguan City, Guangdong Province, bosses of 117 companies in this bastion of Made in China absconded in September and October this year alone, and when banks can’t find their borrowers, good loans become bad ones.
Guangdong Banking Regulatory Commission statistics currently show the NPL ratio of large textile firms in Guangdong standing at 27.3%, the increase in the default rate making banks ever more cautious in granting loans to export companies. The Ministry of Commerce predicted recently that the worsening international economic situation will more deeply affect China’s imports and exports, and that there is no reason to be optimistic about China’s export growth to US, EU, and Japan in the last few months of this year. Under the circumstances, in their own interest, banks haven’t made any detailed scheme for PBoC’s requirement to reinforce credit support for export growth.

Recently the government loosened limits on the purchase of a "second apartment," a bit of good news for the real estate industry. According to the new policy, families whose average living space per head is lower than the local standard can enjoy favorable loan interest rates when buying the another apartment. The banks, however, are having none of it. They say they are waiting for local governments?statistics on "average living space per head" as well as for instructions of headquarters. Drawing lessons from the subprime crisis, banks do not appear to be willing to loosen credit conditions. They want the government to allocate part of the 4 trillion yuan to set up a compensation mechanism for SME loans to compensate them for their possible losses stemming from efforts to support the government’s rescue plan. They also hope the government will support them by way of taxes and charging off bad loans.

The banks can only wait. It is quite probable the government didn’t expect the commercial banks to simply not get in line with PBoC’s monetary and credit policy, but that is what has happened, and what it should have expected, since it decided to promote the marketization of these banks. Welcome to the real world.

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