Today the U.S. passed an ominous milestone with over $1T of national debt this year for the first time ever, and we still have 3 months left to tally. related to that, a brief follow up to our blog last Friday (Leverage Bubble Reinflating, This Time in China), The Standard is reporting that ratings agency Standard and Poor’s is warning that Chinese bank lending accelerated perhaps too rapidly in the first half of 2009. The fear is that any further economic weakness could quickly deteriorate the strength of the banks balance sheets. It is well known that banks are very much tied to the will of the government in China and have presumably been encouraged to lend aggressively and have even directed which type of loans are best to pursue.
As we said last Friday, there is no doubt that this sort of lending can be highly stimulative to an economy in the short run. At the same time, if the loans are given out to poor quality borrowers then the negative effects would ripple through the global economy. It seems the plan is to use these loans in order to help stimulate the economy back to double digit growth, and if the economy returns to that rapid expansion then the banks will be able to handle whatever write-offs may come.
The rapid growth in lending over the first half in the mainland could strain the banking system, rating agency Standard and Poor’s has warned.
It also said there would be a sharp deterioration in the quality of banks’ assets in the next two or three years if there is a protracted economic slowdown in China.
Loan outlays passed a record 7.5 trillion yuan (HK$8.51 trillion) during the first half after the People’s Bank of China eased lending curbs in November as it pressed lenders to back Beijing’s 4 trillion yuan stimulus plan.
“The government remains highly influential over banks’ lending policy,” said Liao Qiang, chief credit analyst at S&P. “It has encouraged banks to make loans to prevent the economy from having a hard landing.”
Banks loaned more to make up for a loss of earnings resulting from lower interest rates, Liao said. They are lending to clients with worse financial metrics than before, Standard & Poor’s said, but noted that loans have roughly satisfied market demand and bad debt is unlikely to soar over the next 12 to 18 months.
“The Chinese banking system should have the strength to deal with the deterioration in asset quality, based on our economic outlook,” Liao said. “But the credit profiles of banks are likely to diverge.”– The Standard