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Boom times could soon be over for China banks

Bad loans are set to rise, even as govt moves from prudent to tight policy

SHANGHAI – THE fat years may be ending for Chinese banks as bad loans increase and monetary policy tightens.

After government bailouts and reforms ended a debt crisis early this decade, bad loans could rebound because of exposure to China’s red-hot property market. But a debacle on the scale of the United States sub-prime credit crisis remains very unlikely, officials and analysts say.

‘The good days for China’s banks are about to end,’ said Mr Qiu Zhicheng, an analyst at Haitong Securities in Shanghai.

‘China’s economy is near the peak of its cycle and growth is slowing down. Banks, the biggest beneficiary of this round of the economic boom, will start to suffer.’

While strong profit growth could be crimped by tighter economic policy, Chinese banks and their share prices will probably continue to outperform lenders in most developed economies that are much more vulnerable to the global credit squeeze.

But regulators are pressing banks to cut loan growth, and the central government announced on Wednesday that it was moving to ‘tight’ monetary policy after a decade of ‘prudent’ policy.

Some banks have already begun to suffer from bad loans in the second half of this year, official data shows.

Outstanding non-performing property loans at Guangdong Development Bank (GDB), in which Citigroup has a major stake, rose by 1.05 billion yuan (S$205.7 million) in the first 10 months of this year, according to the transcript of a speech by Mr Liu Mingkang, chairman of the China Banking Regulatory Commission, China’s top banking watchdog.

As a result, he said he had put GDB on an internal list of about 10 Chinese banks ordered not to extend new loans before the end of the year. These banks may receive further guidelines to restrict loan expansion next year.

‘A rapid increase of asset prices will add overall risk to the national financial system and create considerable credit risk in the banking sector,’ Mr Liu said in a closed-door speech made to senior Chinese bankers and local regulators in late October.

A slight slowdown in the overall economy next year may also sour some loans in overheated sectors such as steel and cement.

‘China’s economy might slow considerably in the next year, in which case the banking industry would bear the brunt and bad loans would rise sharply,’ says Mr Lin Yan, a Fitch Ratings analyst in Beijing.

The non-performing loans ratio of major Chinese banks now averages 5 to 6 per cent, compared to more than 20 per cent before 2003, when Beijing began to use its foreign exchange reserves to bail out institutions such as Bank of China and China Construction Bank.

Some analysts estimate the ratio may rise by 1 or 2 percentage points next year, especially if the government’s efforts to curb the property market misfire.

The authorities are using taxes and administrative steps to try to cool the market gradually, but there is the risk of a sudden pullback of prices.


Source: REUTERS (The Straits Times 7 Dec 07)

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