Are China's Banks Laying the Seeds of a Crisis Down the Line?

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Macroeconomics

Much has been made regarding the speed of China’s recovery by reference to the surge in bank lending during the first quarter of 2009. So the theory goes, the government is pumping liquidity into the system via the banking system which will result in, or is the result of demand from, consumer growth. A recent article in Bloomberg throws doubt on the value of this lending and worse suggests if the economy fails to bounce back to double digit plus growth China could be in line for a wave of banking bad debts 2-3 years down the line.

Chinese banks tripled first quarter lending to $670 billion as part of the government stimulus package. ICBC (Industrial & Commercial Bank) alone advanced over $93bn almost four times the amount extended for the same period last year. China Construction Bank extended $76bn compared to under $27bn last year. Bank of China loaned more than twice the level for the equivalent period last year. So where has all this lending gone and is it, as many suggest, a sign of investment and growth returning to the Chinese economy?

The largest borrower in the quarter was state owned China Aviation Industry Corp (AVIC), the country’s biggest aviation company. AVIC alone received nearly $35bn from a total of 11 banks plus another $15bn from the Export-Import Bank of China, without specifying how the money is to be used. According to Bloomberg, the general manager’s biggest worry is how to allocate the borrowings and actually increase returns, suggesting they have had the money forced on them for political reasons. Companies like AVIC often lend money on to firms that don’t qualify for bank financing increasing the risk of defaults down the line.

In some cases, firms have borrowed just to meet cash flow demands much like GM and Chrysler have done in the US. China Eastern Airlines, the country’s third largest carrier has received nearly $13bn on top of $1bn in government bail-out money after posting a $2.2bn loss in 2008. China Eastern is quoted as saying we aren’t borrowing to expand our fleet or add new routes; we simply want more money to keep the business running. At the same time as borrowing from everyone who will lend to them, the firm is delaying new plane deliveries from Boeing and Airbus.

In an interview with the paper, Deutsche Bank commented that the $277bn of bank lending in March is almost twice the level needed to meet the governments stimulus package, we don’t know the whereabouts of the rest of the lending the bank said. Although Chinese banks point to a reduction in delinquent debt, Fitch China has pointed out that this is due to previous borrowings being written off so the net position has remained steady. In view of the Chinese Academy of Social Sciences own figures that at least 7.5% of the country’s 42 million small and medium sized enterprises have closed or suspended operations since the end of last year and 30 million migrant workers have lost their jobs it seems inconceivable that bankruptcies and bad debts cannot have increased.

As governments around the world throw tax payer dollars at supporting struggling industries it should come as no surprise that China is doing the same, indeed who can blame them? But let’s not at the same time look superficially at lending numbers and draw the conclusion all in the garden is rosy. The reality is many of these will turn into bad debts and China could face a re-run of the 1990’s state directed loans that cost $650mn and took 10 years to clear up.

Our thanks to Lloyd Philip for forwarding the article in question.

–Stuart Burns

Comments (2)

  1. HJG says:

    Well, in the 90s the government was dirt poor thus it took 10 years to clear up 650M. Right now even 20% of the new lendings turn out to be bad loans these big banks with the nation’s purse behind them won’t have liquidity problem. What’s more worrying is the inflationary pressure 6 to 12 months down the road. Hence the resources hogging right now, though hopefully even if commodity market goes crazy in a year China will have secured enough resources to not add to the inflation.

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