The Peoples Bank of Chinas (PBoC) internal
website is hardly a riveting read, but one section tells you
more about the countrys leading banks than a thousand
analyst reports. Tucked away under Previous
Governors is a list of former Beijing central bank
chiefs, running from 1949 to 2002.
At first glance the page contains little out of the usual,
but a second look reveals an apparent programming glitch under
the name of Hu Lijiao, the banks third governor. Hu took
office in October 1964 but never officially left: in August
1966 he was quietly removed from his duties and sent to work in
a labour camp in southern Guizhou province. Only after the
maddest years of Chairman Maos Cultural Revolution had
passed, seven years later, did the PBoC reform, this time under
the watch of the fourth governor, Chen Xiyu.
Chinas financial system has changed out of all
proportion since then, but one parallel remains: the identity
of those pulling the levers behind the scenes. In the 1960s,
power lay squarely in the hands of Mao Zedong. By the second
decade of the third millennium, the power had been spread, but
thickly, and only within the claustrophobic confines of the
Chinese Communist party.
Those who run Chinas leading banks the chairmen
and chief executive officers in the higher party echelons
do so only in name. The real power lies with the
nine-man Standing Committee, headed by president (and party
general secretary) Hu Jintao, and a cabal of 370 old men
comprising the Central Committee. When these two bodies tell
the banks to jump, they jump. And when they tell their banks to
lend, they lend.
So when Beijing, fearing that a global recession would cause
upheaval and riots at home, announced a $600 billion fiscal
stimulus package in November 2008, party leaders fulfilled
their promise of not dipping into the countrys $2.4
trillion foreign reserves, by telling their pet banks to lend
The banks acquiesced, disbursing an avalanche of loans to
leading state-owned enterprises (SOEs), local municipal
authorities, and major domestic infrastructure companies, many
of them divisions of the countrys 1,407 city
Leading lenders such as Industrial and Commercial Bank of
China (ICBC) and Bank of China (BOC) banks also
answerable, in theory, to a coterie of global investors
shelled out $1.4 trillion in new loans in 2009. They are on
track to disburse a further $1.1 trillion this year and $800
billion in 2011 more capital lent by any countrys
banking sector in recorded history.
Two disturbing consequences follow upon Chinas lending
binge. The first is a pressing need among lenders to shore up
their eroded capital base. The other is more worrying and
inevitable: a likely new surge in non-performing loans (NPLs)
that will stretch Chinas generous state finances to the
Despite posting brisk profits for the full year 2009, the
countrys banks desperately need capital. Directed by
party leaders in Beijing, they spent the first quarter of 2010
tapping the Shanghai and Hong Kong markets. In March, Merchants
Bank, widely regarded as the countrys best-managed
lender, raised Rmb18 billion ($2.63 billion) from mainland
investors via Shanghai; the bank is also seeking to raise Rmb4
billion from investors in Hong Kong.
By end-April, two more lenders are expected to have raised
fresh capital. Bank of Communications (BoCom) has applied to
raise up to Rmb42 billion in Shanghai and Hong Kong, while
China Construction Bank, the countrys third-largest
lender, is planning to bolster its capital base by selling
Rmb75 billion of shares, also in the countrys twin
Even ICBC, Chinas largest bank by assets, is seeking
to raise cash, by selling around Rmb25 billion of bonds
convertible into yuan-denominated A shares in
Analysts are mixed on Chinas dash to raise cash
leading banks need a shot of capital to restore eroded balance
sheets, but it also underscores the aggressive lending policies
pursued by leading mainland lenders in 2009, and highlights the
rigidity with which they remain controlled by the party.
Banks can raise capital in New York or London in the
most troubling environment, but in China the CSRC, the
countrys securities regulator, halts any capital raising
when it gets worried, says Bill Stacey, a director at
Hong Kong brokerage Aviate Global. Chinas banks
arent allowed to go to market when they want, or to allow
their rights issues to be underwritten. China has to loosen up
the strings here they will hate it as it undermines
their power and their patronage, but they have to give the
banks more autonomy.
All the while, Chinas forgotten bank bides its time,
waiting for the chance to tap domestic and global capital
markets for the first time: Agricultural Bank of China (ABC),
the last of the big four lenders to sell shares to the public,
is hoping to complete a $2030 billion initial public
offering (IPO), probably in Shanghai and Hong Kong, once its
rivals have raised enough cash to tide them over.
Reginaldo Cariaso, executive director, equity capital
markets, Asia ex-Japan at Nomura says: Agricultural Bank
of China is the big IPO from China that everyone is waiting for
over the next 1215 months.
Chinas looming NPL crisis is, however, of far greater
concern. The countrys banks have wiped sour loans off
their books twice before, in 199899 and again in
200405. But this time it is different. On the previous
occasions, leading Chinese banks were wholly state-run organs;
now they are listed institutions with foreign shareholders,
subject (in theory) to higher levels of scrutiny and
Moreover, the party has never subjected its banks to such a
stress test. Much of the lending during 2009 was parcelled out
in a slapdash fashion to local city councils and state firms,
which in turn pumped cash into local vanity projects likely to
generate little substantive return.
Thus, NPL rates could be even higher than the bad loans
pumped into state projects in the 1990s, much of which simply
lined the pockets of party officials. Some analysts reckon up
to one-half of all new 2009 and 2010 bank loans will go sour,
costing the state between $1 trillion and $1.5 trillion, a bill
that would shred Beijings foreign reserves.
Analysts are mixed over how bad the NPL situation will
become. Anthony Lok, managing director, research at BOCI
International in Hong Kong, believes the situation is
manageable. Loans grew at a steady rate throughout the
2000s, he says. The only difference came in 2009,
when China had a total loan blowout. But one year of excess
spending does not make a bubble. The situation is not as bad as
some people are making out.
Arthur Kroeber, managing director of Beijing-based
consultancy Dragonomics says: An NPL problem is brewing.
Of the loans made between 2008 and the end of 2010, one dollar
in six will turn into a bad loan that is beyond the banks
ability to mark down internally.
The question is whether it is financeable and I
believe the answer is yes, he says. But
this only works if between 2011 and 2020 China doesnt
create any more bad loans or at least it only creates
new bad loans that can be provisioned against.
Kroeber believes the most compelling question is whether
China can wean itself off an almost unique process of
boom-and-bust. Will China stop doing this? If they
dont, then in 10 to 15 years time China will look
much as Japan does today, full of awful debts that cant
be dealt with. I am more optimistic here, as China has a much
better track record than Japan at facing up to problems. But
they certainly need to work out how to do things better in the
Others are concerned at the impact that higher lending will
have on Chinas lesser lenders, those who have disbursed
loans to second-rate infrastructure projects over the past 18
Gao Jian, vice governor at China Development Bank, the
countrys chief policy lender and one of the
countrys best-run institutions, says he is most concerned
about the impact on Chinas smaller banks. Rising
NPLs will hit smaller lenders, he says. We have
seen this situation in the past with NPLs, though there
are some economists based in Hong Kong who have forecast
substantial increases in NPLs in coming years, but I dont
think that will happen.
Others arent so sure. Victor Shih, an assistant
professor at Northwestern University in the US, rose to
notoriety in early 2010 after calculating local Chinese
government debt at around $1.7 trillion twice the
official estimate and one-third of Chinese GDP. The rise, he
said, was largely due to vast quantities of capital pumped into
city authorities and SOEs by profligate banks banks that
will come to regret their largesse.
There is a lot of de facto bad loans that are being
rolled over by banks, he says. Besides special
mention loans troubled loans marked down as
failing rather than failed one
can look for how many short-term loans are being extended as
medium- and long-term loans. This suggests that many
problematic loans are being extended.
Party leaders in Beijing are already kicking up a fuss about
wayward bank lending, and seeking to rein in credit growth. But
the truth is this is what the country does.
China may not be under Maos thumb any more, but for
the countrys leading banks now sucking in capital
from local and foreign markets while toiling under a burden of
new bad loans, both legacies of Communist party edict
the world is surprisingly similar to the 1960s, and the dog
days of Hu Lijiao.