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Record credit sparks bad-loan fears

CHINESE banks extended record credit in January as part of the nation's effort to stimulate the domestic economy, but the outpouring of money has revived the specter of bad loans that haunted the banking industry in the last decade.

"Loans should be made to save those in urgent need and save the poor, but not to save those who abuse credit," the China Banking Regulatory Commission warned.

Still, the flow of loans is widely welcomed amid a global credit crunch that has dried up the funding pipeline for companies and consumers in other countries. Many developing countries are relying on China to weather the storm and help pull the world out of recession.

Banks in China extended 1.62 trillion yuan (US$237 billion) of new local-currency loans in January. At the same time, M2, the broadest measure of money supply, including deposits and cash, climbed 18.8 percent from a year earlier, topping the central government's 17 percent annual target.

"The surge in loans was stunning," said Sherman Chan, a Moody's economist. "New credit was equivalent to 40 percent of the value of the government's 4 trillion yuan fiscal stimulus plan."

New yuan loans in January rose from 772 billion yuan in December and from 803.6 billion yuan in January 2008. Credit has been rising since November, after China scrapped lending quotas, cut interest rates five times and scaled back banks' reserve requirement four times.

"The credit surge is a China miracle as other major economies struggle to unfreeze credit," said Yang Qingli of BOCOM International Holdings Ltd.

First to recover

The global credit crunch has made borrowing harder and more expensive in Japan, the United States, Europe and other countries. They are pumping billions of dollars into their banking systems hoping to unlock liquidity and restore confidence.

Su Ning, the vice governor of the People's Bank of China, said in February that China may be "the first to recover" from global recession, quoting the strong credit growth and other positive economic indicators.

February credit is expected to maintain the momentum. China International Capital Corp believes that February's incremental loan amount will be around 900 billion yuan to 1 trillion yuan. The official figures will be available around the middle of March.

China remains the largest economy that has fended off recession. The National Development and Reform Commission said last month that the central government was "confident" that it would meet the target for 8 percent economic growth this year, following 2008's 9 percent. Developed markets such as the US and United Kingdom are mired in deep contractions.

Still, questions are being raised about the creditworthiness of loans.

Bad loans in the past forced the Chinese government to inject a combined US$60 billion into the Industrial and Commercial Bank of China, China Construction Bank and Bank of China before the three state-owned banks went public in Hong Kong and Shanghai.

The Agricultural Bank of China, the last of the big four state-owned banks to undergo restructuring, received a government bailout of US$19 billion last year to clear its books of dud debt before its listing.

Chinese banks struggled for years to shed the burden of bad loans and develop safeguards that fend off dubious valuations in credit decisions.

Higher risks

Some analysts fear the government will put pressure on banks to take more lending risks. Chan said that banks may face higher risks in coming years if they allow lending procedures to become too lax.

The China Banking Regulatory Commission, China's top banking regulator, is aware of the risk. It has asked the country's five biggest state-owned banks to make further provisions for bad loans.

"It's almost impossible to post both strong loan growth and keep asset portfolios juicy at the same time," Yang said. "Banks may face worsening assets, but let's face that issue in the years ahead. The key strategy now is to help the economy grow."

Guo Shuqing, chairman of China Construction Bank, is at the forefront of the delicate act of balancing the government's urgency to stimulate the economy with the banks' need to retain independent decision-making. The Beijing-based bank is China's major lender to the infrastructure and construction industries, which sit at the heart of the 4-trillion-yuan stimulus package.

Guo said risks may exist in some regions but loans were generally running well. "This is a commercial bank after all, and it should behave like a commercial bank and be independent to do business," Guo said.

While Chinese banks are rapidly extending credit, overseas banks are trimming lending.

In Shanghai, which holds about 70 percent of foreign bank assets in China, lending by overseas financial institutions shrank by 4.34 billion yuan in January, compared with a 22.68 billion yuan rise a year ago.

Their domestic rivals in the city added 82.37 billion yuan in new loans, up 23.31 billion yuan from a year earlier.

Foreign bankers are reining in lending, finding it harder to attract local depositors because of fears over the health of their overseas parents.


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