March saw early signs of what could become a worrying trend: Chinese banks issuing too many loans too quickly. Premier Wen Jiabao wants to see loan growth of US$731 billion in 2009 to support the government’s stimulus plan. Banks have responded by doling out US$237 billion in new loans in January and US$147 billion in Feburary.
The banks are also raising capital to fund this burst of lending. Chinese financial institutions sold US$12.4 billion of bonds in the first two months of 2009, including US$5.8 billion from China Construction Bank alone. Bank of China said it planned to sell as much as US$17.5 billion in subordinated bonds over the next four years while Industrial Bank hopes to raise US$7.3 billion through its own bond issue before the end of 2010. However, analysts said that any gains made from the latter sale will be offset by previously issued debt that has to be bought back.
This has raised fears that Chinese banks might be in for tough times ahead. Some preventive measures have been taken to shore up the Big Four state-owned banks: China Investment Corp pledged to prop up the share prices of publicly listed lenders to prevent price drops due to a share sell-off by strategic foreign investors.
Short-term stock considerations apart, Qiang Liao, associate director for financial institutions ratings at Standard & Poor’s, doesn’t expect these sell-offs to have much impact on the banks as the foreign investors’ roles were always limited.
Government-encouraged lending will have an impact, though. "The risks are that, as banks are encouraged to lend, the rules could be loosened substantially and all the [reforms] of the last few years could be wasted," said Andy Xie, an independent economist.
Analysts say that, while a temporary spike in lending is manageable, banks risk overextending themselves should the current rate of credit growth continue. Charlene Chu, senior director for financial institutions at Fitch Ratings, adds that any misclassification of new or existing loans that turn bad could also distort the banks’ current credit status. This could make recently released profit figures unreliable.
"[People] need to be looking beyond the headline numbers to know what’s going on," she said.