Chinese banks face increased risks of bad loans

22 May 2009

Driven by the Chinese government's stimulus programmes for the revival of its crisis-hit economy, the nation's banks are pumping trillions of yuans to bolster economic growth which could lead to huge material losses in the future, a report by the Fitch rating agency said.
 
China registered a record lending of 5.2 trillion yuan ($762 billion) in the first four months of the current year to fund various stimulus projects initiated by the government, which has already crossed the minimum target set for the whole year. Loans disbursed by the Chinese banks in 2008 were 4.9 trillion yuan ($712 billion).

The Fitch report on China's banks released yesterday said it's seeing early warning signals from the Chinese banking system.

Chinese banks' high profit targets, at a time when the interest rates are declining, are driving up the lending volumes to unprecedented levels, thereby deteriorating the asset quality.

"This emphasis on short-term profit may be contributing to excessive risk-taking by banks, particularly in corporate lending, which could lead to material losses in these portfolios," Fitch said.
 
The Chinese government announced a huge stimulus package of 4 trillion yuan ($586 billion) last year to tide over the financial meltdown.

Fitch said future losses on stimulus lending could turn out to be larger than expected, and it is unclear what share the central and/or local governments ultimately will be willing or able to bear, and more importantly, what share will fall on banks.

More than 90 per cent of the loans have gone to the corporate sector, which is about three times the amount given during the same period last year, while the country's public sector companies registered a slump of 32 per cent in their profits due to continuing weakness in global economy.