China warns banks over asset bubbles - Lenders required to monitor loans

China warns banks over asset bubbles - Lenders required to monitor loans
By Jamil Anderlini in Beijing
Copyright The Financial Times Limited 2009
Published: July 27 2009 12:45 | Last updated: July 27 2009 12:45
http://www.ft.com/cms/s/0/5ec09bb2-7aa1-11de-8c34-00144feabdc0.html


Chinese regulators on Monday ordered banks to ensure unprecedented volumes of new loans are channelled into the real economy and not diverted into equity or real estate markets where officials say fresh asset bubbles are forming.

The new policy requires banks to monitor how their loans are spent and comes amid warnings that banks ignored basic lending standards in the first half of this year as they rushed to extend Rmb7,370bn in new loans, more than twice the amount lent in the same period a year earlier.

Beijing’s concerns are echoed in other countries across the region, most notably South Korea, where the government says it is taking steps to cool a real estate bubble, and Vietnam, where the government has ordered state banks to cap new lending to head off inflation.

The situation in much of Asia is very different from most Western economies, where governments have flooded the financial system with liquidity to encourage unwilling banks to lend more.

In China, regulators are now concerned that too much money is being lent by the state-controlled banks and the country’s tentative economic rebound could come at the cost of a stable financial system.

In statements published last week, Wu Xiaoling, who recently retired as deputy governor of the central bank, warned new lending this year would probably reach as high as Rmb12,000bn, a staggering increase of 40 per cent of the entire stock of outstanding loans in just one year.

She called this sort of growth excessive and said it would lead to bubbles in the property and stock markets.

The flood of new lending also has implications for the quality of bank loans and the country’s overall growth.

“China's economic recovery is being constructed on the back of a savaged banking system,” said Derek Scissors, a research fellow at the Heritage Foundation in Washington. “Tens of billions – and perhaps hundreds of billions – of dollars of loans will not be repaid.”

He points out that in recent years total loan growth of around 15 per cent has supported gross domestic product growth of higher than 10 per cent but in the first half of this year total loan growth of around 33 per cent supported GDP expansion of only 7 per cent.

“China's economic policies have shifted from being unsustainable over the very long term to being unsustainable for any more than one year,” Mr Scissors said.

China’s benchmark stock index has already more than doubled from the low it reached last November and property prices have also rebounded strongly with state media reporting long queues and scuffles at sales promotions for some new real estate projects.

Ms Wu hinted Beijing may soon raise the amount of money banks must hold on deposit with the central bank, marking a change of policy from last year when it aggressively slashed the reserve requirement ratio and interest rates.

The central bank has also ordered 10 banks, including Bank of China, to buy Rmb100bn worth of central bank notes with a maturity of one year and a return of just 1.5 per cent, according to Chinese media reports.

This move is interpreted as a warning to banks that have been the most active lenders that they should now start to rein in their excessive behaviour.