The tug-of-war over monetary policy between China’s central bank and its banking regulator earlier this year reduced the country’s economic dilemma to a single conflict. On the one hand, the People’s Bank of China (PBoC) wanted to promote credit growth as a means of sustaining the economic recovery. On the other, the China Banking Regulatory Commission (CBRC), wary of past calamities, didn’t want domestic lenders doling out cash with abandon.
The tensions no longer spill over quite so keenly into the press, but after total new loans came to US$1.08 trillion in the first half of the year, the issue remains a pertinent as ever. So the regulators are treading carefully.
Reports that Beijing would asks major banks to increase their capital adequacy ratios to 13% next year – up from an average of around 11%, a shift it was estimated would leave Bank of China needing US$14.6 billion in fresh capital – were met with a swift denial by the CBRC. Rather than imposing across-the-board targets, the regulator said, banks have been warned to meet their current capital requirements or face sanctions. Punishments include limits on market access overseas investments and new branch openings.
The CBRC has been tightening its grip on lenders for a while now: The capital adequacy ratio increased by two percentage points to 10% at the end of last year; credit provisions must now total at least 150% of bad loans; and the issuance of subordinated bonds has been curtailed.
These are cautious tweaking of the regulatory system, not wholesale alterations in monetary policy. While more diligent enforcement of existing rules on capital adequacy requires banks to raise more money if they want to lend more money, a return of interest rate hikes, credit quotas and required reserve ratio increases (making banks hold back a higher proportion of their assets) isn’t likely. At least, not yet.
Shen Mingao, Citi’s chief China economist, expects a slow exit from stimulus conditions, with credit growth easing in 2010, but remaining at a faster pace than in normal years.
“In general, [interest] rate hikes do not happen at the beginning of a policy exit. Open market operations, hikes of bank reserve requirement rates, normalization of credit growth, project control and other administrative interventions can be expected to come before rate hikes are considered,” he wrote in a note dated November 23. “When rate hikes are unable to cool off the economy, credit control is often the last resort.”
Unless inflation jumps, deposits drop sharply or other central banks impose aggressive tightening measures, Shen doesn’t expect an interest rate hike until at least the third quarter of 2010.
So what of China’s banks? Will the CBRC’s tinkering (and it said on Monday that it won’t impose controls on the size of bank loans) be sufficient to stave off another non-performing loans (NPLs) crisis?
The credit explosion in China has probably led to a depreciation in loan quality, with money going to places from which it is unlikely to return. At the same time, while domestic banks still have much to learn about risk assessment, their judgment is far better than it was in the 1990s, when the seeds of the previous NPL problems were sown. It will take time for the truth to emerge. Analysts say that there is a lag of at least a year before problem loans appear as warning lights on banks’ balance sheets. Perhaps marking off certain debts as “special mention loans” (a concern, but not yet non-performing) will once again delay the impact.
For now, most banks – and most regulators – are more concerned about raising enough capital to meet next year’s credit demands. According to BNP Paribas, the nation’s 11 largest publicly traded banks may need to raise about US$43.9 billion to ensure they have capital for continued loan growth. Citi estimates that the A-share banks alone require US$16.5 billion by 2011, and that’s excluding US$15.5 billion in fundraising drives already announced.