China Races to Rein In Lending Risk
November 24, 2009
Wall Street Journal
Banks Told to Follow Capital-Adequacy Rules, but Regulators Plan
HANGHAI—China’s banking regulator issued a stern warning to banks to strictly comply with capital requirements or face sanctions, the clearest sign yet that Beijing is worried about possible risks building in the country’s financial system after a year of blowout lending.
Banks that fail to comply by year’s end with capital-adequacy requirements—or rules governing the amount of capital they must hold against their loans—could be punished with limits on market access, overseas investments and new branches, the China Banking Regulatory Commission said.
New loans in the first half of this year totaled 7.37 trillion yuan ($1.079 trillion), equivalent to half of the country’s gross domestic product over the period, as the government turned to bank lending to power its economic stimulus plans.
There are fears that the lending binge could saddle banks with large amounts of nonperforming loans, reversing some of the gains achieved over the past decade of financial reforms aimed at turning China’s state banks into commercial lenders better able to manage risk.
The tough statement indicates that Beijing is ready to more actively tighten the credit growth that has been the linchpin of China’s economic recovery. Higher capital requirements act as a constraint on lending; some banks would need to raise additional money before they could make more loans.
The capital-adequacy requirement was raised to 10% from 8% at the end of last year. At the same time, banks were ordered to set aside credit provisions equivalent to at least 150% of their bad loans.
A spokesman for China Construction Bank Corp., one of the country’s four biggest state lenders, said the regulator “is considering imposing stricter capital requirements for lenders” next year, and the bank is monitoring the situation.
A CBRC spokesman said there won’t be any sudden changes in banks’ capital requirements. In its statement on Monday, the CBRC said it doesn’t plan to impose any controls on the size of bank loans.
In the past, Chinese authorities have curbed overheated lending by imposing sweeping credit quotas. This time, they appear to be adopting a more market-oriented approach, while being prepared to use ad hoc measures as needed.
Last week, the regulator issued verbal instructions to a midsized Chinese state lender that it must limit outstanding loans for the last two months of the year to its level at the end of October, according to an internal bank memo reviewed by Dow Jones Newswires. The regulator denied issuing such a notice.
No other banks seem to have been similar instructed. But medium-sized banks in particular have had trouble maintaining their required capital levels and remaining within loan-to-deposit limits.