China watchers were caught off guard by June’s lending figures, which surged to US$223.94 billion, after having fallen to US$97.25 billion in May. In total, banks extended US$1.08 trillion worth of new loans in the first half of 2009, outstripping the US$717.17 billion issued in all of 2008.
In the short term, analysts say this poses little threat to China’s banking sector. The medium-term outlook is murkier. While some fear that a wave of non-performing loans (NPL) could emerge at the end of 2010, others expect economic growth and vigilant regulators to keep the sector stable.
"In the short term we think the risk to asset quality is limited,"said Yuk Kei Lee, an analyst with Core-Pacific Yamaichi in Hong Kong. Lee said he doesn’t expect a more difficult operating environment, as the government may loosen monetary policy.
Risk controls at Chinese banks have improved greatly in recent years, reducing the factors that led to NPLs in the 1990s. But Leo Wah, a vice president with Moody’s, said that explosive loan growth in the first half is cause for some concern.
"When banks are increasing loan growth aggressively it is difficult to believe that credit quality controls are completely the same as what they had been before,"he said.
Nonetheless, he believes that China’s banking sector will remain strong in 2009.
Economists expect lending to slow in the second half, as loans to infrastructure projects have already been allocated. However, a State Council-affiliated economist in June estimated that roughly half of lending in the first five months of 2009 was channeled into equity and real estate markets, raising fears of asset bubbles.
Still, China is unlikely to drastically change its monetary policy until the economic recovery is on solid ground. Consequently, interest rates and banks’ required reserve ratios are likely to remain stable this year.