Banks' Fast Loans to Economic Stimulus Cause Concern of Bad Debts

The introduction of the central government’s 4 trillion yuan program to stimulate the nation’s economy has gotten China’s state-owned commercial banks to announce their credit plans for the rest of the year, in line with the special political mission of China's banking sector. But although there will be no lack of good credit opportunities, the emphasis on speed by central authorities will increase the possibility of big bad debts.

Yi Gang, vice-governor of the central bank, said that domestic inflation pressures have eased, but liquidity is abundant, implying that bank credit at this time should give a helping hand to the financial plan. Prior to this, the central bank slowed the issue of central bank bills to encourage commercial banks to throw open liquidity. The sudden stimulus plan by the government contains 100 billion yuan of projects in the fourth quarter. Compared with uncertain overseas financial products and real estate credit, these projects with intangible financial guarantee offer good capital opportunities.

The announced credit direction to some extent returns the Agricultural Bank of China (ABC), China Construction Bank (CCB), and the Industrial and Commercial Bank of China to their past professional background. CCB said that infrastructure construction is its traditional advantage and that it will focus on major projects of railways, highways, and airports, supporting development of affordable housing projects and real estate. ABC has been more involved in projects on rural areas, agriculture and farmers' livelihood.

It is nothing new for commercial banks to provide loans to

government-led projects. The four major state-owned banks suffered greatly from this problem in the past when they were still specialized banks. In 1993 China started a second round of reforms and many projects were initiated by local governments. Serious budget deficits and, in particular, tight central finance resulted in the failure of timely funds, which eventually brought the financial burden back to the bank. Although the financial power structure is quite different today, "fast" was put on the first agenda of the stimulus plan put forward by Premier Wen Jiabao, which indicates an emphasis on speed for project launching. Even if there are funds to pave the way, bad debts could easily accumulate when the problems of local government--redundant construction projects, lack of careful assessment, lack of financial expertise--arise. Moreover, 100 billion yuan is only the first installment of a huge project.

 

Zhao Qingming, deputy general manager of CCB’s research and development, noted that, due to poor management, in recent years there are projects which cannot repay their loans on time, such as government-led highway construction. The current economic situation is bound to enlarge credit to government-led projects. Therefore, to strengthen cash flow assessment of the projects is an important task.

In addition, Mu Hong, deputy director of the National Development and Reform Commission (NDRC), said today that in order to ensure that projects are worthy of money from taxpayers, NDRC and the Ministry of Finance and other departments are setting up a coordinated working group to prevent funds from entering high pollution, high energy-consumption or overcapacity industries. This may provide something of a firewall for bank lending.