Tag Archives: bank loans

Beijing Bolsters Its Banks

THE STIMULUS APPLIED to restore the economy post-pandemic has done nothing to lessen the fragility of an overleveraged financial system. If anything, Covid-19 has slowed the drive to reduce the debt overhang in the banking system.

Authorities have now issued long-awaited draft rules to ensure the capital adequacy of its global systemically important banks (G-SIBs, or those ‘too big to fail’).

The regulations from The People’s Bank of China and the China Banking and Insurance Regulatory Commission (CBIRC) stipulate that from the start of 2025, G-SIBs must be able to absorb losses of at least 16% of their risk-weighted assets, or at least 6% of their total exposures. From 2028, those ratios increase to at least 18% and 6.75%, respectively.

The four biggest state-owned commercial banks are listed as G-SIBS by the Financial Stability Board (FSB), the G20 body set up after the 2008 global financial crisis to monitor the global financial system. They are Bank of China; Industrial and Commercial Bank of China, Agricultural Bank of China and China Construction Bank.

The credit rating agency S&P said last month that the quartet fell short of the capital requirement by 2.25 trillion yuan ($330 billion) as of the end of 2019 and that without raising further capital would be around 6 trillion yuan adrift by 2024. The draft rules will be out for public comment until October 30.

Several regional banks have required bailouts, including Bank of Jinzhou, Hengfeng Bank and most notably Baoshang Bank, which has been allowed to fail, the first Chinese bank to do so in decades.

A national plan was drawn up in May to speed up capital replenishment across the banking system and to put in place the necessary bulwarks against a potential systemic banking collapse by giving central government more coordinating power over provincial-level and below supervision of such actions. Local governments will bear the brunt of the financial burden of recapitalising the banking sector as they own or control either directly or through local SOEs and investment holding companies hundreds of the weakest lenders.

Earlier this year, CBIRC’s vice chairman, Zhou Liang, said that 4,000 of the country’s 4,600 licensed banking institutions were small and midsize banks that together accounted for about a quarter of the sector’s total assets. More than 600 of them are undercapitalised, and more than 500 characterised as of ‘high risk”. That is mainly the result of a combination of lax oversight, poor or policy-driven lending decisions and corruption.

Forced provincial-level mergers of weaker banks are likely, along lines already seen in Shanxi and Sichuan.

Assuming any local political obstacles to restructuring can be removed, there will remain the need to inject better corporate governance, lending standards, risk management and accountability into banks. Whether local authorities have the capacity and expertise, let alone the financial wherewithal to do that is another question. On the last, Beijing is allowing local governments to use 5% of this year’s 3.75 trillion yuan quota of special-purpose bonds for bank recapitalisation.

However, that also raises questions of how far public funds should be used for bank bailouts, as that potentially shuffles where the risk lies rather than reduces it. The same argument can be made about suggestions that the sovereign wealth funds’ investment arm, Central Huijin Investment, should take stakes in financial institutions in need of repair, as it has already done in the recapitalisation of Hengfeng Bank.

The bigger bullet to bite is whether more insolvent banks should be allowed to go bust, although the stalled bankruptcy law for financial institutions needs to become law first.

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A Stimulus By Any Other Name

When is stimulus spending not a stimulus package? When it is previously planned projects just being brought forward, apparently. State media are reporting that Beijing is saying that it is not going to stimulate the economy in the way it did after the 2008 financial crisis (via Bloomberg). That pumped 4 trillion yuan ($600 billion) in to China’s economy, an steroid-like injection of credit whose side-effects are still being felt in persistent inflation, ailing bank debt and excess industrial capacity.

With the economy again slowing, the temptation is to fall back on tried and trusted methods of state capitalism, and the devil, again, take the consequences. Up to point. Latter this year a new generation of leaders will be ushered in who will have to establish their political legitimacy and sustain the Party’s legitimacy through making all Chinese better off. A delicate balance between a quick fix and sustainable growth will have to be found that still promotes the long-term rebalancing of the economy.

So all praise to five-year plans. The National Development and Reform Commission, the agency that oversees national planning and green-lights individual projects lower down the development food chain, has the capacity to advance 1 trillion-2 trillion yuan-worth of infrastructure projects. It has already approved nearly 900 projects in the first four months of this year, twice the number in the corresponding period of last year. If anything, the pace of new approvals is gathering.

The constraint on policymakers is anunwillingness to repeat 2008s reliance on bank lending to local authorities to finance the stimulus, and a reluctance of the big-state owned banks to make their balance sheets creak any more under a further burden of new loans. Hence the talk on more private-sector financing of the proposed infrastructure investment in railways, energy, green technology, telecoms, healthcare and education.

This month, Beijing has announced a series of measures to give more scope to private capital and to expand domestic demand by subsidizing sales of consumer goods (as it did after 2008). Whether China’s private lenders will provide better judges of risk than their state-owned counterparts is yet to be seen, especially when there are national development goals breathing down their necks. Yet there is also no getting away from the fact that lending outside the state-owned banking sector is rudimentary or informal. The big state owned banks will still have to do most of the heavy lifting of a new stimulus, however it is labeled. Everyone will want to keep their load as light as possible.

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Are China’s Regulators Pricing In A Real Estate Bubble Burst?

China’s latest stress tests for its banks include a simulation in which property prices fall by almost two-thirds in the most overblown markets, according to a Bloomberg report. Previous stress tests had no more than a one-third drop in property prices as a worst case.

The latest tests, apparently ordered last month, suggest regulators are increasingly concerned about the property bubble bursting, leaving banks with huge bad loans on their books in the wake of last year’s record $1.4 trillion of new loans. Authorities have been reining in new property lending since April. This has halted the growth in property prices but in the 70 cities monitored prices were still up 11.4% in June over the same month of 2009.

The fear is that a 60% stress test implies the banking regulators expect that sort of fall in some cities. That would not be an unreasonable assumption given that prices in cities like Beijing and Shanghai have doubled in this bubble. (Our abacus reminds us that a 60% fall in a price means it had to rise 150% in the first place to end up where it started). In which case, a second bail-out of the big banks’ balance sheets can’t be far behind, though heaven knows what can be done about the shadow banking system. Not much that is too big to fail there, though in the aggregate it will be a mess.

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Reining In Bank Lending Further

The central bank is playing a finely balanced game. It is asking the big state owned banks to provide assessments of their uncollateralized loans, especially to local and provincial governments who have used captive investment vehicles to get round budgetary restrictions on their spending, loans that often find their way into real estate speculation..

The banks may well be told find assets to back loans that aren’t collateralized, such is the way of administrative guidance. If the banks can’t they may have to declare the loans as non-performing.

The risk there is that neither the banks nor the economy is in rude enough health to take the hit. There are plenty of people nervous enough about the prospect of a property bubble driven crash for it to become self-fulfilling if the bank loan spigot is turned off too abruptly, though turned down at the very least it most assuredly must be. Last weekend’s increase in bank’s reserve requirements may be another formal step to rein in bank lending, but a bit of arm twisting will be more effective — providing the central bank knows quite how hard to twist short of breaking something.

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Central Bank Reins In Commercial Bank Lending

With warnings that bubbles are swelling in China’s stock and property markets becoming more common by the day, the central bank is starting to drain off some of the liquidity engorging prices. The big state-owned commercial banks cut back their new lending sharply in July, to 168 billion yuan from June’s 497 billion yuan in June, according to Caijing.

One worry of the central bank is that the stimulus-inspired lending spree of the first half will result in bad debts piling up eventually on the banks’ books. So banks have been told to tighten lending standards, with new rules handed down late last month on project financing, fixed-asset and working-capital loans. Recalcitrants have had their loan books shrunk by being required to buy the central bank’s paper. It is a sort of loan quota in the guise of open-market operations.

The big-four — Industrial & Commercial Bank of China, Bank of China, China Construction Bank and Agricultural Bank of China — typically account for half the bank lending in China. But smaller urban commercial banks have been chewing away at that market share in recent months, reducing it to about a third. That will dampen the effect of the central bank’s actions, so it is a fair bet the smaller banks will now move into the regulators’ focus. New approvals of subordinated debt issues have already stopped for small and mid-sized banks to choke off loan-book growth.

The balancing act for the central bank remains to guard against bad debt and inflation without draining off so much liquidity that the markets go pop and the re-acceleration of economic growth is reversed.

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China Eases Bank Restrictions

Confirmation from the central bank that the strict limits on bank lending have been relaxed to help sustain rapid economic growth. People’s Bank of China spokesman Li Chao also told Xinhua that China must be flexible over monetary policy. Banks’ reserve requirement ratios are being left unchanged, though, as, Li said, there was ample liquidity in the banking system.

Li’s remarks are only the latest, if clearest, signals of the policy shift to ease bank restrictions. Earlier this week, a former official said that the central bank was no longer enforcing the quotas on small business loans imposed earlier this year, and that it may scrap the quarterly quotas for 2009. Loan controls were imposed and enforced in the first half of 2008 to slow credit growth and prevent the economy from boiling over. That though was three interest rate cuts in six weeks and a global economic slowdown ago.

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