The warning bell is still ringing on Beijing’s US$1.1 trillion in bank lending in the first half of 2009 and its possible future effects. This time, it’s ratings agency Standard & Poor’s that’s carrying the hammer. The company presented its 2009 mid-year outlook in Shanghai yesterday.
“The surge of lending in early 2009 suggests risk of over-stimulation. This could lead to a marked rise in non-performing loans (NPLs); at worst, to [a] misallocation of capital and an abrupt drop in growth,” wrote Ryan Tsang, senior director of Greater China corporate ratings and China financial institutions ratings.
Tsang and his colleagues expect more bad loans in 2009 and 2010, but at what they say is “a manageable pace.”
The negative impact of NPLs will depend on central government policy. At the moment, political winds are blowing toward favoring a tighter lending policy in the second half of 2009, though for the time being, Beijing says it will stay the course. The National Audit Office of China has also said that it will pay particular attention to loans made by state-owned banks when auditing Beijing’s finances this year.
“We view this as a good sign that regulators, although on one hand they have to think about the overall economy, they’re not taking their eyes off the ball,” Tsang told China Economic Review. “They are still worrying about risks some time down the road.”
Banks are expected to follow suit by controlling loan growth in the second half and raising their credit-cost provisions, wrote Macquarie analysts Nick Ward and Sarah Wu in an August 17 report.
Regulators and banks should be on the lookout, though, as risks may come from unexpected corners. Typically high-risk real estate companies, for instance, may not prove to be problematic; many made sure they had depleted their inventories before buying land for new projects. Tsang said NPLs could instead come from companies such as small private power providers, which operate in semi-protected industries in which revenue streams are set by the government.
“The [power] tariff has been increased a bit, but for some small operators that’s not enough,” he said. “The coal price is going down a bit – whether that’s material enough to improve their debt-serving ability to the level required is not known.”