China Lending Boom May Hamper Banks’ Asset Quality, BIS Says

By Joost Akkermans and Christopher Anstey

Dec. 7 (Bloomberg) -- China’s lending boom may erode the quality of bank balance sheets as a jump in lending was “unavoidably” linked to an easing of credit standards, the Bank for International Settlements said.

“While strong loan growth in China has fuelled the current economic recovery, it is not without risks,” the Basel, Switzerland-based BIS said in a quarterly report published today. The credit expansion “raised concerns about excessively loose credit conditions.”

The warning underscores a need for higher loss provisions at the nation’s lenders that China’s financial regulator has already identified. The agency is pushing banks to raise ratios of reserves to non-performing loans to 150 percent by the end of this year, according to the BIS.

“Some of the banks are in need of additional capital” given the surge in credit this year, Jing Ulrich, Hong Kong-based chairwoman of China equities and commodities at JPMorgan Chase & Co., said in a Bloomberg Television interview before the BIS release. “Some time next year we will see some more banks coming to the market to raise equity capital,” she said, adding that the central bank may boost the reserve requirement ratio.

Chinese officials encouraged a $1.3 trillion credit boom in the first 10 months of 2009 to aid stimulus plans, pushing the economy to its fastest pace of growth in a year last quarter. A “significant” part of loans doled out by banks may have flowed into equity and property markets, the BIS said.

Investment Projects

The credit-fueled increase in investments “may imply additional demand for loans in the future, to complete the underlying project,” the document said. Should China tighten monetary policy, that could “leave projects incomplete and lead to a build-up of bad loans.”

China Banking Regulatory Commission Vice Chairman Wang Zhaoxing wrote in an article published in China Finance magazine that the agency has asked the nation’s larger lenders to increase their minimum capital adequecy ratios to 11 percent.

The regulator last year raised the minimum required capital adequacy ratio for publicly traded banks to 10 percent from 8 percent. It said in September it plans to tighten capital requirements by capping cross-holdings of subordinated bonds.

Industrial & Commercial Bank of China Ltd., the world’s largest bank by market value, had a capital adequacy ratio of 12.6 percent as of Sept. 30, while Construction Bank Corp. was at 12.11 percent. Bank of China Ltd.’s capital adequacy ratio stood at 11.63 percent and the ratio at Bank of Communications Ltd. was 12.52 percent.

China has been among Asian nations that have strengthened guidelines for bank loss provisioning in recent years, in part stemming from their experience during the region’s 1997-98 financial crisis, the BIS said in its report.

“This has contributed to stronger banking systems in the region,” the bank said.

The BIS was founded in 1930 and is the world’s oldest international financial organization, according to its Web site. The BIS says it serves as a bank for central banks and acts as a forum for policy discussions and analysis among central banks.

To contact the reporter on this story: Joost Akkermans in Hong Kong at jakkermans@bloomberg.net