China's bank loan surge

The China Securities Journal reports that bank loans in China rose to a record monthly high of 1.2 trillion yuan (US$176 billion) in January amid government calls to step up lending. The new loans, which account for some 20 per cent of the total lending plans of China's big four banks for all of 2009, were primarily directed at infrastructure development projects, as opposed to business spending.

While the announcement of the loan numbers boosted the stock value of Chinese banks, the risk of increased non-performing loans looms over the horizon, as banks expand lending and raise their risk tolerance to adhere to government mandates.

The Chinese economic stimulus package has focused heavily on infrastructure development to maintain employment and investment and ultimately spur a rise in domestic consumption. Unofficial Chinese estimates suggest China's economy is overly dependent on exports and investment (including foreign direct investment). Some 40 per cent of the Chinese economy is dependent upon foreign trade, with another 35 per cent based on investment. This means the rapid reversal of global consumption has had a massive impact on the Chinese. Numbers from the National Bureau of Statistics seem to confirm that the drop in exports was the biggest contributor to the decline in China's 2008 gross domestic product (GDP): Exports contributed some three percentage points to the 2007 GDP growth rate of 13 per cent, while accounting for just 0.8 percentage points of 2008's 9 per cent GDP growth.

The January surge in lending to help fund infrastructure projects shows the Chinese banks cooperating with Beijing, at least in part. Beijing has plans to inject about one-quarter of a pledged 4 trillion yuan stimulus package into the economy from central government coffers, with the remaining funds coming from provincial governments and bank loans. All of this is supposed to be spent through 2010, with the bulk up front. The banks are certainly living up to this initial challenge. But there is an ulterior motive for Chinese banks: a fear that lowered loan requests from businesses affected by the economic slump, coupled with more cuts in interest rates, will leave the banks' profit margins razor-thin at best. By expanding lending at current interest rates, the banks are signalling to Beijing that there is no need to cut rates further. But the speed and size of the lending increase – a record for a single month, some 50 per cent higher than loans in January 2008 – also raise the possibility that many of these loans are excessively risky, and down the road could lead to a renewed swell in non-performing loans.

One other unintended consequence of the surge in infrastructure lending might be a continued reticence of banks to lend to China's small-and-medium-sized enterprises (SMEs). As part of the domestic consumption drive and the intent to increase new jobs available for those losing their employment in the export slump, Beijing eased capital restrictions on banks, encouraging them to lend more not only to provincial and local governments for infrastructure development, but also to SMEs.

But the latter still seem to be lagging, and high-level banking officials are warning that the large-scale credit surge is neither sustainable nor necessarily beneficial in the long run, as it could lead to a future increase in non-performing loans. So while Beijing's stimulus plans are certainly moving from the rhetorical to the physical phase faster than those of many other countries, it is far from certain whether the stimulus will revive the Chinese economy or make up for the losses from exports.

Stratfor provides intelligence services for individuals, global corporations, and divisions of the US and foreign governments around the world.