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Moody's: China banking reform deepens
(China Business Weekly)
Updated: 2004-06-13 09:25
China's banking sector, aided by the nation's entry to the World Trade
Organization (WTO), is poised to press on with reforms, Moody's Investors
Service notes in a newly published report.
At the same time, strong economic growth and the prevailing controlled
interest rate regime make it possible for the banks to generate handsome
interest income, especially from new growth areas, such as consumer lending,
Moody's said last week in its industry outlook, titled "China: Reform Continues
To Progress, But Requires Time As Problems Persist."
China's rapid money supply growth has been driven by a strong economy, the
large influx in foreign direct investment (FDI) and the presence of a fixed
exchange rate.
Moody's said deposits will increase if both GDP and FDI continue to grow
rapidly. That, the agency added, will apply pressure on banks to increase
lending.
At the same time, banks' desire to quickly expand market share before 2007
encourages rapid growth.
Recent signs of rapid rises in the prices of raw materials and power
shortages will squeeze manufacturing companies' profit margins.
To offset losses, such businesses will boost production, which means they
will have to borrow more from the banks. As a result, the credit quality of
borrowers - with ongoing margin falls - will become questionable, Moody's noted.
Concerned with overheating, the People's Bank of China and the China Banking
Regulatory Commission have issued specific directives aimed at curbing loan
growth.
Those directives include tighter real estate lending rules and hikes in
deposit reserves' rates.
But Moody's noted the efficacy of the directives is questionable, as they
conflict with the intrinsic growth operating mindset of most Chinese banks.
Bank managers must perform against a set of operating targets on loan and
deposit growth - and the reduction of NPLs (non-performing loans).
"The administrative mandate to reduce NPL levels is actually driving banks to
inflate the equation denominator by extending loans to supposedly promising
sectors," Moody's said.
"Risk-adjusted returns are not yet a consideration. Consequently, because
managers have to meet their performance targets, loan growth will be difficult
to slow down."
Moody's suggested initiatives aimed at tightening lending to overheated
sectors, reforms of rural credit co-operatives and a gradual loosening of
interest rates are intended to divert lending from fixed-asset investments to
the small- and medium-sized enterprises (SMEs) - and the rural areas.
However, Moody's believes the effects of such lending will be limited - at
least initially.
The recent government-led, US$45-billion recapitalization of two State-owned
commercial banks - Bank of China (BOC) and China Construction Bank (CCB) - has,
given its scale and speed, accelerated reform and affirmed the government's
commitment to providing support for these key institutions.
Moody's also expects additional, and more pervasive reforms, to
follow.
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