China to Tolerate More Bad Loans, Relax Credit Rules

By Philip Lagerkranser

Jan. 12 (Bloomberg) -- China will tolerate an increase in bad debt this year as it eases rules governing bank lending to revive the slowing economy, the nation’s banking regulator said.

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 today. A transcript of his speech was obtained by Bloomberg News.

Bank of China Ltd. and Industrial & Commercial Bank of China Ltd. fell in Hong Kong trading today. 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 $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.

Stimulus Plan

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 $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, the world’s largest bank by market value, and competitors have said they’ll increase lending as part of the government’s $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 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 fell 6.1 percent to HK$1.84 at the 4 p.m. close in Hong Kong, while Bank of Communications dropped 5.1 percent. ICBC lost 5.2 percent.

‘Ardous Task’

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

Funding Channels

China’s economy will expand 7.5 percent this year, the slowest pace in almost two decades, as the global financial crisis worsens, the World Bank predicts. Exports probably fell the most in a decade in December even after the government increased rebates, pledged more export loans and stalled currency gains, according to economists surveyed by Bloomberg News.

Central Bank Governor Zhou Xiaochuan, speaking to reporters today in Basel, Switzerland, said there are downside risks to the government’s target of 8 percent economic growth this year.

The regulator will have a “reasonable tolerance” for rising bad loans, Liu said. Shrinking corporate profits and interference by local governments have “seriously” reduced borrowers’ willingness to repay debts, he added. Banks cut their average bad-loan ratio to 5.49 percent at the end of September, from 6.3 percent six months earlier.

Still, the CBRC will ban companies from taking up new project loans to repay existing ones, and prohibit bundling of non-performing assets into securities, according to the transcript. Banks will not be allowed lend to production projects before investors get relevant approval, Liu said.

The regulator will also broaden the channels for banks to boost capital and urge them to increase provisions, Liu said without being more specific.

To contact the reporter for this story: Philip Lagerkranser in Hong Kong at at lagerkranser@bloomberg.net