Sunday 17th of January 2021

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China Regulators Fear Banks Lending Too Quickly

China banks’ efforts to increase profits through more lending could be setting up a bubble that government regulators fear ultimately could hurt financial markets around the world.

The China Banking Regulatory Commission fears credit is expanding too quickly in the country and setting up the potential for an increase in the number of nonperforming loans for the world’s fastest growing major economy. It warned the banks about this Wednesday in a nationwide teleconference.

Because they are state-owned, the banks are required to follow policies set by the government in regard to lending. The regulators often give such mandates privately to top bank officials, so there is no confirmation that any direct orders already have been given.

However, Industrial & Commercial Bank of China Ltd., the nation’s biggest lender, and China Citic Bank Ltd. reportedly stopped approving all new loans for the rest of January. This action follows Bank of China doing the same last week.

Economists say such methods of heading off lending growth unlikely would harm the country’s economy. However, there is practically no way for outside lenders to tell if that is true.

Regulators already have raised the ceiling on the share of deposits that banks must keep in reserve – a move atypical of other nations’ economies. The benchmark stock index in Shanghai has dropped 9 percent since the beginning of the year and concerns about the country’s credit policy have affected international markets.

Other nations usually affect lending by adjusting the price of credit through interest rate changes, which is something the Chinese government prefers not to do. Instead, it sets limits on loan volume.

Last year brought an end to the tight limits of 2008, leading to an increase in lending to 9.59 trillion yuan ($1.4 trillion) that revived the economy. The limits are back, with the government setting a maximum of 7.5 trillion yuan ($1.1 trillion) for the year.

The limits have brought a different sort of competition among the banks to loan faster than the other institutions and claim a bigger share of the quota. A report from a state-run news agency indicated new loans for the first two weeks of this month equaled 1.1 trillion yuan ($146.6 billion).

Officials of the Bank of China and Industrial & Commercial Bank of China have acknowledged the pace of new loans granted in the first half of January was too quick. Neither bank reported the totals of their loans.