Chinese banks nearly doubled their lending in January, raising concerns that loan quality could suffer, but banking and policy experts told Xinhua they believe financial institutions won't return to the days of high non-performing loan (NPL) rates because the industry's risk controls and capital base have improved.

The banks won't experience the same problems plaguing financial sectors in other countries, despite the pressure of the global economic downturn, the experts said. That is because much of the new lending this year will probably result from the central government stimulus plans, which will go into projects such as railroads with solid, long-term earnings prospects.

Fears over loan surge

A report last month by Bank of Communications analysts, "China's Economic and Financial Outlook in 2009," forecast that lending would expand about 16 percent this year, or by 4.8 trillion (about $703 billion) to 5 trillion yuan.

Similar figures were given last week by Premier Wen Jiabao, who told the annual legislative meeting that China would follow a proactive fiscal policy and moderately easy monetary policy this year. As a result, Wen said, banks were likely to extend 5 trillion yuan in new loans this year.

The China Banking Regulatory Commission (CBRC) said banks extended a monthly record of 1.6 trillion yuan in new loans in January, more than double the figure of 803.6 billion yuan a year earlier.

The CBRC said loans grew by 456.1 billion yuan in November and 771.8 billion in December. The loan surge began not long after China announced a two-year, 4-trillion-yuan stimulus plan. After that plan was announced in November, banks stepped up lending, experts said.

National figures haven't yet been announced for February, but Jiang Jianqing, chairman of Industrial and Commercial Bank of China (ICBC), the country's top lender, told the legislative meeting last week that his bank's new loans in February exceeded 100 billion yuan. He forecast that the bank's loan portfolio would grow 12 percent to 13 percent this year.

The lending wave has aroused concern that higher NPL rates might lie down the road, as the global turmoil increasingly affected China and its banks.

Wu Nianlu, vice president of the China International Finance Society, told Xinhua Monday that although the overall condition of the Chinese banking sector was healthy, "we should also be alert to the banking sector's development and potential risks in the near future.

"If economic growth slows, the risk of new NPLs would rise," he added.

Ready for risk

However, Liu Mingkang, head of the CBRC, has played down fears of a new NPL crisis.

Although the financial crisis had hit the global banking sector hard, "its impact on China's banking system is limited and the risks are under control," he told a press conference last month to discuss the January loan figures.

Subsequently, in an interview during the legislative session, Liu said: "There has been no data to date showing that the asset quality of Chinese banks was declining."

Other banking analysts have given similar assurances.

Cao Fengqi, director of the Research Center for Finance and Securities of Peking University, told Xinhua that shareholding reforms and improved risk controls that have been put into place since 2003 had helped Chinese banks improve their capital adequacy ratio (CAR) and competitiveness.

The CBRC imposes an 8 percent level for CAR, a measurement to assess a bank's capital relative to its risk. The CAR level was originally set under the Basel Accords through the Bank for International Settlements, and it is imposed in each country by local regulatory authorities.

The average CAR of Chinese banks surpassed 8 percent for the first time in 2007.

The CAR for the whole banking sector in 2008 hasn't yet been released. But as of the end of September, the CARs of ICBC, the Bank of China (BOC) and China Construction Bank (CCB) stood at 12.62 percent, 13.89 percent and 12.1 percent respectively. By way of comparison, the CAR of US-based Wells Fargo Bank was 11.88 percent at the end of 2008, according to Zhang Jixiu, an analyst with domestic Bohai Securities.

Shareholding reforms, NPL controls

In 2003, China launched shareholding reforms for state-owned banks, a process intended to transform them from wholly state-owned entities into publicly traded companies with the government as controlling shareholder.

The country's top three lenders - ICBC, CCB and BOC - were listed in the domestic and Hong Kong stock markets. Shareholding reforms at the Agricultural Bank of China are under way.

"The shareholding reforms have put more competitive pressure on 'the big four' state-owned banks and helped domestic banks improve their asset quality, management and risk controls," Cao said.

Total assets of Chinese banks increased from 27.66 trillion yuan at the end of 2003 to 62.39 trillion yuan by the end of 2008,the CBRC said.

The experts interviewed by Xinhua said banks had also increased efforts to avoid NPLs since China adopted a moderately easy monetary policy and eased banks' loan curbs during the third quarter of 2008. Since September, China has reduced the banks' required reserve ratio four times.

The loan loss reserve adequacy ratio and provisioning coverage ratio of China's state-owned commercial banks reached 153 percent and 109.8 percent last year, 122.2 and 76.4 percentage points higher, respectively, than in 2007, according to CBRC figures.

The corresponding figures for China's publicly listed commercial banks rose to 198.5 percent and 169.6 percent in 2008, respectively, from 2007 levels of 170.2 pencent and 114.5 percent, CBRC figures showed.

These increases have left Chinese banks well-placed to cope with any increase in NPLs, the experts said.

And Chinese banks' NPLs have been been declining, they noted. The ratio fell to 2.45 percent at the end of December, down 3.71 percentage points from the end of 2007.

Positive changes in the sector were reflected in the banks' return on capital, which rose 0.4 percentage point in 2008 to 17.1percent, Liu said.

Stimulus spurs loan growth

Much of the recent surge in lending has represented financing for long-term infrastructure programs supported by the government, part of the stimulus package, as well as large and medium-sized state-owned companies, said Tang Jianwei, a senior analyst with Bank of Communications.

Tang noted that the 4 trillion yuan included 1.18 trillion yuan from the central government, with the rest coming from local governments and private investment, part of which would be channeled through the banking system and accounted for the lending increase.

"The new loans in January were mainly targeted at infrastructure and other projects to improve living standards. It will take time for us to see the benefits, but they will surely do a great deal of good for the Chinese in the long run," Cao said.

Weighing loan quality

When assessing the quality of the loans, a major factor was how much social benefit the projects being funded could create, Wu said.

"Loans for those projects and carefully chosen borrowers would not involve big risks. The 4 trillion yuan stimulus package would provide domestic banks with better earnings prospects this year," Tang added.

Tang forecast that the banking sector's net profits might grow more than 5 percent this year because of booming loan business.

Xiao Gang, BOC chairman, said over the weekend that banks had become stricter about lending than years ago, and the recent loan expansion was not a result of loose standards.

NPL management would also be subject to many types of supervision, from independent directors of the bank and independent accounting firms to government departments such as the CBRC and People's Bank of China (PBOC), the central bank, Xiao added.

Smaller companies, western borrowers

Besides large projects and companies, a big slice of the new loans also went to smaller firms and less developed interior regions, which badly needed financing as they struggled with the impact of the global recession.

Several banks have announced lending efforts specifically aimed at such borrowers. For example, BOC has said it would extend 200 billion yuan in loans to central China's Henan Province for public transportation and infrastructure projects over the next five years.

Bank of Communications said it would lend 60 billion yuan to Shaanxi Province for infrastructure and projects to boost the manufacturing sector and improve living standards.

"Although the overall development level of China's middle and western regions falls behind the more prosperous eastern and coastal areas, the investment and economic growth rates in the middle and western areas were higher than the national averages in recent years, suggesting bigger growth momentum," Tang said.

Though banks were still cautious about loans to the private sector and small and medium-sized enterprises (SMEs), the national infrastructure projects would eventually benefit all sectors, including SMEs, said Lian Ping, chief economist of the Bank of Communications.

Tang also forecast the government this year would announce policies to encourage banks to lend to SMEs, whose access to finance has long been limited.

Almost 52 percent of corporate loans in 2008 went to SMEs, with the amount by value up 13.5 percent year-on-year, said Zhou Xiaochuan, the PBOC governor, during the legislative session last week.

Tang Zhenning, an official with ICBC's executive office, told Xinhua that the bank's lending to smaller companies focused on manufacturers with good credit records, and the loans had done much to help these SMEs get through the crisis and avoid job cuts.

Banking shares gain

Chinese banking shares outperformed the Shanghai index in late February and early March, even as the stocks of their US and European peers were plunging. Some representative shares of banks in China, the United States and Europe show the diverging performances of sectors in each area.

For example, the shares of China Construction Bank and Bank of China, the second- and third-largest banks in China, have risen about 1.5 percent and 5.9 percent to 4.22 yuan and 3.58 yuan, respectively, in the past week.

Meanwhile, in the United States, Citibank's shares slid 14.2 percent to $1.03 during the same period, and Wells Fargo Bank's shares dropped 20.57 percent to $8.61.

Shares in Deutsche Bank AG, Germany's biggest bank, fell 4.38 percent to 18.79 euros (about $14.80).

Tang said that the recent surge of domestic banks' loans and increasing income from this business had buoyed investor confidence in their shares.

Of the five publicly listed Chinese commercial banks that have already released preliminary results for 2008, all estimated that net profit rose at least 30 percent over the 2007 level. Three banks - Bank of Beijing, China Citic Bank and Bank of Nanjing - estimated that annual net profit rose 60 percent to 70 percent.

Ou Minggang, director of the International Finance Research Center of China Foreign Affairs University, noted that interest rates had been cut five times last year, with bigger cuts to lending rates than deposit rates. Ou said these asymmetrical cuts had squeezed banks' profit margins, while the recent surge in loans might involve potential risks.

But he said banks had improved their risk control to reflect these pressures, with the goal of maintaining profitability.