April 16,2009

Bank Watchdogs See Risks Rising from 6.1% Q1 GDP Growth

By CSC staff, Shanghai
The 6.1% growth of China’s GDP in the first quarter, the lowest in the past ten years, would have been an impossible dream without the support of the 4.58 trillion yuan new lending from China’s banks.
 
The banking system has being working overtime to grant loans since November last year, when the Chinese economy began seriously to slow. The China Banking Regulatory Commission (CBRC) cancelled limits on banks?credit lines to guarantee the smooth implementation of the State Council’s four trillion yuan stimulus.
 
At the same time as it has been trying to guarantee economic growth, though, CBRC’s concern over credit risk has also been increasing. As the scale of lending spreads, it sees risks accumulating in any number of areas, particularly including bill financing, lending to local government projects, real estate industry loans, group clients, and big criminal cases.
 
Although China’s banking system may at present be the world’s soundest, and some signs of rebound have occurred, the CBRC believes the global economy is still in a downturn and is unlikely to recover in the short period. China’s industrial growth has reached a record low and production surpluses in some industries are very serious. Profit levels for industrial enterprises are plummeting.
 
Shrinking external demand means exports are unlikely to promote economic growth, while the surplus domestic work force has a negative influence on consumption stimulation.
 
Under these circumstances, CBRC thinks financial institutions must continue to support economic growth.  At the same time, they must also pay great attention to risks lying behind rapid credit growth.
 
According to central bank statistics, lending of financial firms totaled 36.56 trillion yuan at the end of March, up 26.97%, year on year. Among the total, RMB loans totaled 34.96 trillion yuan, a growth of 29.78%, year on year. The CBRC worries that that growth contains within it enormous credit risks.
 
Most striking is the increasing risk behind the explosive growth in bill financing. Since the CBRC cancelled limits on credit scale in November, 2008, and encouraged commercial banks to reinforce financial support for economic growth, commercial banks have seen rapid credit growth for five straight months, with bill financing taking a large proportion, as much as 45% in February this year, an historic high.
 
Commercial banks?competition amongst each other for bill financing has led to lower discount rates, even lower than deposit rates. Most bill financing lacks real trade background, triggering concerns that most of the money raised has flowed as speculation into the stock market. The CBRC launched a special inspection over bill financing in February and started another inspection at the beginning of April.
 
The CBRC is also very worried about loans to local government projects. Under the guidance of government policies, commercial bank loans have mainly flowed to large enterprises and to projects, especially those involved in government stimulus plans. 100% of the loans of a branch of the Bank of Ningbo in the first quarter, for instance, have gone to projects with government background.
 
Due to low capital funds of government financing vehicles, and asset liability ratio commonly as high as over 80%, risk on local government loans is increasing. To push the stimulus, some projects were launched in a hurry, with local governments?repayment ability very doubtful.
 
The CBRC is also paying attention to loans to the real estate industry. Housing development loans are increasing steeply, its percentage of total loans surging from over 30% at the end of last year to more than 60% at the end of the first quarter. Real estate investment and land inventory loans in some areas are growing fast. Some areas are seeing excessive competition in the housing loan business. 
 
Big criminal cases in the banking industry are beginning to rebound this year, and the CBRC has pointed out that since the number of big cases of credit fraud is surging, banks need to pay special attention.
 
The severe economic situation and new risks due to high credit growth will challenge not only commercial banks, but also supervisory departments. According to past experience, once credit grows faster than 20%, quality will see a major decline.
 
Some analysts believe, judging from the situation in the first quarter, this year’s total credit scale may reach 8 trillion to 10 trillion yuan. However, CBRC Chairman Liu Mingkang said at an internal meeting in Tianjin that new lending this year may be restrained at about 6 trillion yuan. "According to my experience, a monthly growth of 500 billion yuan is a limit. An annual credit growth higher than 6 trillion yuan will lead to many risks. So, this year’s new lending will stand at 5 trillion to 6 trillion yuan."

 

 

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