China to relax credit rules, tolerate bad debt

The China Banking Regulatory Commission will drop its target of reducing the balance and ratio of bad loans after five years of declines, and instead aim to prevent a “massive and rapid rebound” in soured debts, Chairman Liu Mingkang said in Beijing Monday. A transcript of his speech was obtained by Bloomberg News.

Looser requirements may fuel concerns about a surge in bad loans, four years after China finished a cleanup of its banking system that cost more than US$500 billion. Lenders will likely face weaker asset quality, rising defaults and “significant” constraints on profits in 2009, Standard & Poor's said Jan. 7.

“What we're concerned about is whether banks will, after government interference, boost lending without properly recognizing the risks,” said Liao Qiang, the rating company's Beijing-based analyst, in an interview. “Governments tend to relax prudential regulatory requirements in difficult times. The key is how banks react.”

Measures to boost credit include allowing banks to lend to businesses afflicted by temporary financial woes because of the global recession but with sound fundamentals, Liu said. Lenders can also restructure loans and “scientifically” adjust the types and maturities of debt, and the regulator will support the sale and securitization of loans, he said without elaborating.

Decades of state-directed lending pushed the bad-loan ratio among Chinese banks to almost 20 percent in 2003, prompting a government bailout. Agricultural Bank of China received US$19 billion from the nation's sovereign wealth fund in October, almost four years after the bulk of the banking cleanup was completed.

Industrial & Commercial Bank of China Ltd., the world's largest bank by market value, and competitors have said they'll increase lending as part of the government's US$590 billion stimulus package, announced in November. China's biggest banks are all state-controlled.

Bank of Communications Ltd., the nation's fourth-largest lender by market value, will now follow a principle that “safeguarding economic growth is safeguarding banks” themselves, Chairman Hu Huaibang wrote in the central bank-affiliated China Finance magazine Dec. 16.

Bank of China Ltd. fell 6.1 percent to HK$1.84 as of 3:25 p.m. in Hong Kong, while Bank of Communications dropped 5 percent. ICBC lost 5.2 percent.

Chinese banks extended 740 billion yuan (US$108 billion) of new loans in December, the most since January 2008, the Shanghai Securities News reported Monday, citing unidentified people.

“Apparently the government is willing to sacrifice the interests of banks to salvage the whole economy as forcing them to lend against the economic cycle will only lead to bad loans in the future,” said Wang Yihuan, a Beijing-based analyst at China Asset Management co., which manages the equivalent of US$36 billion.

The CBRC encourages lending to fund small and medium-sized businesses, mergers and acquisitions among large companies, as well as credit for automobile and home appliance purchases, according to the transcript.

“The downside risk to the Chinese economy is even worse than anticipated,” Liu, 62, said in the speech. “The 8 percent growth target is of great importance, but an exceptionally arduous task.” Liu last month said expansion of 7 percent or less could trigger social instability.

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