China's banks extended a surprisingly large amount of new loans in June, more than doubling that of May's, while driving up possibilities of bad loans and excessive production capacity amid a credit boom.
Preliminary calculations showed that new lending was 1.53 trillion yuan, the central bank said on its website yesterday, bringing total lending this year to 7.4 trillion yuan, far exceeding the country's initial full-year target of disbursing 5 trillion yuan in loans. Total lending so far this year amounted to almost one quarter of last year's GDP.
June's figure was the third-biggest monthly sum this year, after the 1.89 trillion yuan lent in March and the 1.62 trillion in January.
The surge in June loans is a result of the government's decision to pare the equity capital requirement of fixed-asset investments in May, Liu Yuhui, director of the Center for Chinese Economic Evaluation at the Chinese Academy of Social Sciences, told China Daily.
The equity requirement for railway, road and metro projects was lowered to 25 percent from 35 percent, while the ratio for airport, port and inland shipping construction was lowered to 30 percent from 35 percent.
"The lower requirements for infrastructure-related investment projects mean that it will be easier for the local governments to borrow from banks to fuel local infrastructure construction," Liu said.
"The eye-popping loans in the first quarter is a result of the central government's 4-trillion-yuan stimulus, and now it's the turn of the local governments to start the borrowing spree," he added.
In addition, some of the new lending this month was also the result of the sustained recovery in residential property transactions, which usually drive up mortgage loan expansion, said Liu.
"Demand may also have been augmented by concerns over potential monetary tightening as borrowers consider the medium-term inflationary repercussions of loose monetary conditions," Jing Ulrich, managing director and chairperson of JPMorgan's China equities business, said in an email research note.
The record pace of lending is making the central government uneasy that bank credit is creating new bubbles in China's stock and property markets and could sow the seeds of a new crop of bad loans in the predominantly state-owned banking system. The focus must now shift from the quantity to quality of lending, said Glenn B Maguire, Asia Chief Economist of Societe Generale Corporate and Investment.
Wang Huaqing, vice-chairman of the China Banking Regulatory Commission, said on Tuesday that banks should spread risk by syndicating big loans for projects like railways and airports.
The surge has also reminded some analysts about the Asian financial crisis in 1997 and 1998 when Chinese banks went on a lending spree to often less than creditworthy state companies, only to get saddled with a mountain of bad debt that forced the government to bail out its biggest lenders years ago ahead of their initial public offerings.
(China Daily July 9, 2009)
