Bank of China to continue lending expansion

Bank of ChinaBank of China Ltd., which doled out the most loans among Chinese banks in the first half, plans to keep expanding credit unless the government clamps down on the nation’s record lending boom.

The nation’s third-largest bank will maintain its original target of generating about 10 percent of China’s new loans in 2009, Beijing-based spokesman Wang Zhaowen said by telephone yesterday. Bank of China may “fine tune” its strategy in line with any government policy changes, he said.

Bank of China advanced a record 902 billion yuan ($132 billion) of loans in the first half, leading a credit explosion that drove stocks and property prices higher and helped spur an economic recovery. The lending spree, encouraged by the government, has fanned concerns that asset bubbles will form and bad loans will rise, and the bank regulator yesterday called on lenders to control the flow of credit.

“Banks are willing to sacrifice their long-term health for short-term gains in profit, and more importantly, to please the government,” said Wen Chunling, a Beijing-based analyst at Fitch Ratings. “A significant part of the loans extended in the first half may become non-performing over the next five to 10 years.”

The China Banking Regulatory Commission has indicated in past weeks it’s concerned about excessive credit creation. Yesterday, the watchdog told banks to ensure loans intended for investment in fixed assets go to projects that support the real economy.

‘Moderately Loose’

That push is colliding with the government’s attempts to ensure an economic recovery.

Premier Wen Jiabao last week pledged to maintain a “moderately loose” monetary policy, suggesting the government is more concerned with keeping the economy growing than with preventing a rebound in bad debts.

“Banks have every incentive to dole out more loans,” said Yang Qingli, a Beijing-based analyst at BOCOM International Ltd. “When the government is driving in the fast lane, you can’t just stop immediately.”

New loans in the nation may surge to a record 11 trillion yuan this year as the government is still concerned about “a possible second dip in the recovery path,” BNP Paribas SA said last week. China’s economic growth accelerated to 7.9 percent in the second quarter.

“We will continue to expand lending and other business to implement the government’s fiscal and monetary policy and help economic growth,” Bank of China’s Wang said. “The key strategy won’t change.”

Bad Loans Drop

The bank, 67.5 percent government-owned, accounted for 12.2 percent of new loans in China in the first half.

Non-performing loans at China’s 17 biggest lenders, almost all of which are state-controlled, fell by 43 billion yuan from the start of the year to 444 billion yuan as of June 30. Foreign lenders, which hold less than 3 percent of China’s banking assets, reported an 11 percent increase in soured debts in the period, according to the banking regulator.

Chinese banks extended a record 7.37 trillion yuan of new loans in the first half, triple the amount offered in the same period a year earlier and 47 percent more than the government’s full-year target, after lending restrictions were eased in November to stem an economic slowdown.

“I would say Chinese banks failed the test in dealing with this economic crisis,” said Wen of Fitch Ratings.

Standard & Poor’s said July 10 that credit risks are “mounting” at domestic banks and asset quality is likely to deteriorate this year and in 2010. The weakening of asset quality remains “manageable,” the ratings company said.

Bank of China will continue to lend to 10 key industries with government policy support, including steel, shipbuilding and automobile, Wang said. About 30 percent of its loans went to those industries in the first half.

Source: Bloomberg

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