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Aggressive loan growth in China

Thursday, July 23, 2009

Chinese blowing a credit bubble

Finance Asia:

Aggressive loan growth could significantly stretch the banks' newly developed risk management systems, and the quality of new loans is expected to be inferior to the quality of those written a year ago, S&P analysts say.

Loan growth among Chinese banks hit more than Rmb7.76 trillion ($1.13 trillion) in the first half of 2009, a record high. As a result, asset quality is likely to slip further in 2009, but should remain highly manageable. It could deteriorate sharply in the next two to three years, however, if the economic slowdown is protracted in China. Chinese banks seem to be lending so aggressively despite the economic slowdown for three key reasons.

First, the strong growth suggests that the banks' corporate governance is still relatively weak and that the government continues to exert strong influence over banking practices as a dominant shareholder. Second, the banks appear willing to extend additional funding to borrowers facing cash-flow difficulties on the premise that such difficulties are short-term in nature and should correct themselves when China's growth recovers. And third, they may be looking to compensate for the negative effects on earnings from the squeeze in net interest margins.

We expect the quality of new loans to be on average inferior to the banks' loan book a year ago. That's because the banks are either expanding into an enlarged but inferior client base or making incremental loans to existing clients with deteriorated financial metrics. Some new borrowers had no or limited access to bank credit in the past because they didn't meet previous underwriting standards

My comment: Money created by the central bank and put into the Chinese banking system is being loaned out and in more then a few cases to inferior credit risks. Economic history shows that booms that eventually bust are created when this occurs, like in the OECD the last few years. It appears the Chinese are succumbing to what Talleyrand said of the Bourbons, "They have learned nothing, and forgotten nothing." This bears watching as I am expecting an inventory restocking/stimulus jolt uptick to the economy before we head back down for a double dip to this recession/depression.

Posted by John Polomny at 8:26 PM