April 14,2009

Credit Expansion May Continue to Year's End and Hit 9 Trillion Yuan

By CSC staff, Shanghai
With the issue of 1.89 trillion yuan in new loans in March, 90% of the targeted annual credit growth has been completed in just the first quarter. Major research institutions are adjusting 2009 credit growth projections. It is generally believed that annual incremental credit will reach 9 trillion yuan, far more than the expected 5 trillion yuan.
 
The credit growth this year has flowed mainly to large projects and companies owned by central and local governments. During the first 3 months, the infrastructure category of new loans from state-owned banks rose substantially, up 28%, 26% and 33%, respectively.
 
New loans in March from the Industrial and Commercial Bank of China, Bank of China, Construction Bank, and Bank of Communications amounted to 310 billion yuan, 226 billion yuan, 170 billion yuan, and 74 billion yuan, totaling nearly 800 billion yuan, accounting for 41.3% of all new loans in March.
 
New bank lending in the first quarter often accounts for 30% to 40% of the whole year. Due to the credit limit, last year’s new loans accounted for about 30% in the first quarter, while the proportion of the previous two years reached about 40%.
 
Credit growth in this first quarter amounted to 4.58 trillion yuan. If previous trends maintain, it is expected that the year’s lending will reach 11.45 trillion yuan based on the proportion of 40%. However, analysts point out that the first quarter’s lending may be out of proportion due to this year's special circumstances.
 
Analyst Li Huiyong of Shenyin Wanguo Securities said that, assuming lending in the next three quarters is not less than the average level of the past 3 years, it could reach 7.2 trillion yuan. He estimated the range may be between 7.2 trillion to 11.6 trillion yuan, and that it is likely to reach 8 trillion to 9 trillion yuan.
 
"It is not out of possibility that annual new loans will reach 9 trillion yuan, based on the proportion of 50%," A report from the China International Capital Corporation (CICC) states. Earlier, CICC had estimated that lending throughout the year would reach 8 trillion yuan. It seems the explosive credit growth in March was unexpected.
 
If credit reaches 9 trillion yuan this year, that is nearly double the growth of 4.9 trillion yuan last year. Analysts believe that, for now, as long as there is real demand, it is not difficult to support the large-scale growth with current loan-to-deposit and capital adequacy ratios.
 
CICC roughly estimates that if the new loans reach 9 trillion yuan, the loan-to-deposit ratio will still be around 70%, below the 75% limit, and capital adequacy is sufficient. With the four major state-owned banks, if new lending reaches 9 trillion yuan, capital adequacy may fall from 12.7% at the end of last year to 11.7% at the end of this year, still far from the "red line" of 8%.
 
Since banks do not look to change their money-making method of "more-loans, more proceeds" in the long term, there will not be great changes to credit policies under the current environment of maintaining growth. The banks?current good performance lays a foundation for loans and the rapid credit growth for the entire year.
 
If credit growth this year is over 8 trillion yuan, broad sense money supply (M2) will be far greater than the established goal of 17%.  The possibility is not ruled out that the management will rein in banks?lending impulse. CICC points out that if the Central Bank adjusts M2 to 20%, incremental credit should be limited to around 6.3 trillion yuan.
 
But analysts believe regulatory authorities will allow expanding lending growth with the target of maintaining growth. JP Morgan Chase says that, according to experience from the 1997 Asian financial crisis, fixed asset investment over 50% supported by loans is considered normal. If the investment in fixed assets this year is 15 trillion to 16 trillion yuan, credit growth reaching 7 trillion to 8 trillion yuan is within the permissible range.
 
The recent plenary meeting of the Central Bank’s Monetary Policy Committee noted that sufficient liquidity in bank system must be maintained while the need for credit growth is satisfied.
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