Kane Davis Cooper - Lending by Chinese banks is expected to slow over the next six months as they have used up almost all of their yearly allocations, increasing fears of defaults as the cost of borrowing rises.
The central government’s clampdown on unsafe lending has already had an impact on profits and has increased borrowing costs. It is estimated that 80% of the annual quota has been used up in the first six months compared with around 60% at the same time last year as shadow financing is brought back under control.
“Loan demand is strong throughout the whole year,” said Ma Kunpeng, chief financial industry analyst at China Merchants Securities. “The core conflict in the second half is loan quota – whether banks will be able to extend more loans than they originally planned.”
The country's biggest lenders, all with trillions of dollars under their control, will issue their six monthly results over the course of the next fortnight as the country saw a 13% rise in yuan loans that are outstanding over the first six months this year.
The central bank has also boosted the number of checks being made on banks’ off-balance products – a crucial part of shadow banking credit at the same time as the banking regulator ratcheted up its clampdown on risky lending practices.
“Corporate defaults will rise if the availability of finance is further restricted. This could become a threat to economic growth ... especially if defaults are concentrated in labour-intensive segments like steel and coal,” said the rating agency Moody’s.
Economic growth has shown indications of a slowdown as borrowing costs increase but Beijing, with the 5 yearly Communist party leadership rearrangement later this year the government is sure to ensure a soft landing in order to maintain stability.
Chinese banks saw profits higher in the first six months o the year but with credit slowing, the second half is likely to be tighter.