China Lending Boom May Hamper Banks' Asset Quality, BIS Says
Dec. 6 (Bloomberg) -- China’s lending boom may erode thequality of bank balance sheets as a jump in lending was“unavoidably” linked to an easing of credit standards, theBank for International Settlements said.
“While strong loan growth in China has fuelled the currenteconomic recovery, it is not without risks,” the Basel,Switzerland-based BIS said in a quarterly report publishedtoday. The credit expansion “raised concerns about excessivelyloose credit conditions.”
The warning underscores a need for higher loss provisionsat the nation’s lenders that China’s financial regulator hasalready identified. The agency is pushing banks to raise ratiosof reserves to non-performing loans to 150 percent by the end ofthis year, according to the BIS.
“Some of the banks are in need of additional capital” giventhe surge in credit this year, Jing Ulrich, Hong Kong-basedchairwoman of China equities and commodities at JPMorgan Chase &Co., said in a Bloomberg Television interview before the BISrelease. “Some time next year we will see some more banks comingto the market to raise equity capital,” she said, adding thatthe central bank may boost the reserve requirement ratio.
Chinese officials encouraged a $1.3 trillion credit boom inthe first 10 months of 2009 to aid stimulus plans, pushing theeconomy to its fastest pace of growth in a year last quarter. A“significant” part of loans doled out by banks may have flowedinto equity and property markets, the BIS said.
Investment Projects
The credit-fueled increase in investments “may implyadditional demand for loans in the future, to complete theunderlying project,” the document said. Should China tightenmonetary policy, that could “leave projects incomplete and leadto a build-up of bad loans.”
China Banking Regulatory Commission Vice Chairman WangZhaoxing wrote in an article published in China Finance magazinethat the agency has asked the nation’s larger lenders toincrease their minimum capital adequecy ratios to 11 percent.
The regulator last year raised the minimum required capitaladequacy ratio for publicly traded banks to 10 percent from 8percent. It said in September it plans to tighten capitalrequirements by capping cross-holdings of subordinated bonds.
Industrial & Commercial Bank of China Ltd., the world’slargest bank by market value, had a capital adequacy ratio of12.6 percent as of Sept. 30, while Construction Bank Corp. wasat 12.11 percent. Bank of China Ltd.’s capital adequacy ratiostood at 11.63 percent and the ratio at Bank of CommunicationsLtd. was 12.52 percent.
China has been among Asian nations that have strengthenedguidelines for bank loss provisioning in recent years, in partstemming from their experience during the region’s 1997-98financial crisis, the BIS said in its report.
“This has contributed to stronger banking systems in theregion,” the bank said.
The BIS was founded in 1930 and is the world’s oldestinternational financial organization, according to its Web site.The BIS says it serves as a bank for central banks and acts as aforum for policy discussions and analysis among central banks.
To contact the reporter on this story:Joost Akkermans in Hong Kong at jakkermans@bloomberg.net
Last Updated: December 6, 2009 15:00 ESTSource: Bloomberg
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