Download Title Chinese Banks Heed CBRC Warning Teaser Several major

Title
Chinese Banks Heed CBRC Warning
Teaser
Several major Chinese banks respond to a CBRC warning to fortify their
capital bases or face limits on expansion.
Summary
A number of top Chinese banks have drafted plans to raise capital in
response to a warning by the China Banking Regulatory Commission
(CBRC). To avert a wave of unemployment during the global recession,
Chinese banks loosened their monetary policies, which resulted in a massive
lending surge. Now, after lending nearly a fourth of China's GDP in a single
year, Chinese banks are attempting to raise billions of yuan.
Analysis
Several top Chinese banks have submitted draft plans to raise capital in
recent days, including Industrial and Commercial Bank of China, China
Construction Bank, Bank of China, Bank of Communications and
Agricultural Bank of China. The banks are responding to a Nov. 24 warning
by the CBRC that if they do not fortify their capital bases, they will be
subject to harsh penalties limiting their market activities, outward
investment and expansion.
China's financial system relies mostly on banking, with other financial
institutions providing only about 20 percent of total financing. The major
commercial banks, despite being publicly traded companies, are bound
closely to the political leadership in China and respond directly and
indirectly to political directives. At the time of the global recession, China's
central government faced a possible wave of unemployment, which in
heavily populated China could lead to regime-endangering instability. To
prevent this from happening, Beijing chose to loosen monetary policy, adopt
a wide-ranging fiscal investment program, and encourage the banks to lend
to their hearts' content, with little oversight, propping up businesses across
the country.
The result was a massive lending surge, which from January to October
amounted to 9.71 trillion yuan ($1.42 trillion) worth of new loans, raising
the total number of outstanding loans in China's system by 35 percent
compared to the same period the previous year. This is nearly 13 percent of
the total assets held by Chinese financial institutions (75.3 trillion yuan or
$11 trillion). In other words, China lent roughly a fourth of its GDP in a
single year.
This enormous amount of lending has inevitably been accompanied by great
risks -- namely a decrease in loan quality. China's banking system has been
one of the country's slowest economic industries to conform to international
practices, and lending standards and risk management are poor -- China
prefers a system that maximizes growth and employment over one that
provides high returns on investment. A large portion of the new loans have
little hope of generating good returns, and will likely become bad debt
weighing down the financial system in the end.
Hence the warnings from the CBRC and other prominent Chinese officials -especially since July -- to control the lending spree. The CBRC's recent
admonitions are meant to more directly effect this change. If the banks are
forced to raise their capital adequacy ratios from the 11 to 12 percent range
up to an estimated 13 percent, they will necessarily curtail lending. The
CBRC has denied that it is technically mandating the 13 percent ratio, most
likely to avoid signaling monetary tightening in the midst of a fragile
recovery. STRATFOR sources say capital requirements will probably be
raised early next year and that they will apparently differ according to each
bank's circumstances. For the moment, then, the CBRC has opted to cajole
the banks into presenting new fundraising plans consisting of selling shares,
issuing bonds or eliciting cash injections from stakeholders -- which they
have promptly done -- aiming to raise billions of yuan. For instance, Bank of
China is seeking an estimated 100 billion or $14.6 billion.
Having the banks replenish their capital is necessary given the enormous
lending spree. But it is only a beginning. First, with exports still sagging -they are down 21 percent for the first three quarters of 2009 compared to the
same period in 2008 -- the Chinese economy is not in a position to
dramatically cut back on lending. And Chinese banks typically concentrate
the year's lending quotas in the early months, which means that January will
likely bring another surge. Moreover, the amount of capital that the top 11
commercial banks are attempting to raise has been estimated to be about $43
billion, which is only 3 percent of the value of the year's new loans.
A cycle has emerged that is difficult to break. Rampant lending was
restrained on three occasions in 2009, but these restraints had the effect of
creating another lending surge when they hit ailing sectors of the economy.
The question for the Chinese government is how to withdraw this
unsustainable amount of lending and maintain economic stability while
preparing the way for the country's economic strategy going forward. The
CBRC's recent warnings are a step in this direction, but they do not yet
amount to a dramatic move.