China may lose on rising lending

Bloomberg

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China’s record lending growth and weaker corporate profits will lead to credit losses for banks, according to Fitch Ratings, which is "growing increasingly wary" about the nation’s banking industry.

"At the heart of these concerns is the recent steep rise in corporate exposure amid concurrent decline in enterprise profits," Fitch analysts led by Charlene Chu said in a report yesterday. "This means that each Chinese yuan invested or lent is unlikely to generate the same return as before, which over time will take its toll on corporate borrowers’ ability to repay and lead to credit losses for banks."

Corporate loans accounted for more than 90 percent of the record 5.17 trillion yuan ($758 billion) of loans Chinese banks offered in the first four months of this year, almost triple the amount granted in the same period a year earlier. The nation’s state-owned companies posted a 32 percent decline in profit in the same period.

Slowing growth

China is battling a global crisis that sapped export demand, dragging growth to 6.1 percent in the first quarter, the slowest in almost a decade. Overseas shipments declined 22.6 percent in April from a year earlier. Premier Wen Jiabao told lenders to boost loans by at least 5 trillion yuan in 2009 to support the nation’s 4 trillion yuan stimulus plan, triggering an explosion in credit, which has added to the risk of bad loans and asset bubbles. Banks face "significant" pressure on profits this year, Liu Mingkang, the head of the China Banking Regulatory Commission, said last week.

Total lending may top 8 trillion yuan in 2009, Xiao Gang, chairman of Bank of China, said on May 15.

An emphasis on meeting loan targets and short-term profit may be contributing to "excessive risk-taking" by banks, Fitch said. The slow recognition of credit losses by lenders in China not only leads to "under-capturing" of nonperforming loans and delayed credit costs, but also inflated capital, it added. Bad loans at Chinese banks fell by 10.7 billion yuan in the first quarter to 549.5 billion yuan, according to official figures. The ratio of soured debt relative to the total fell 0.38 percentage point to 2.04 percent.

The drop came at a time when at least 7.5 percent of the country’s 42 million small and medium-size enterprises had closed or suspended operations by the end of last year.