More of the poison may provide cure
Just as the fallout from the mainland's last lending binge starts to show, Beijing faces a quandary: whether to fall back on a similar stimulus to boost its slowing economy.
Mainland banks' bad loans increased for a second quarter, the first time in about six years, according to the China Banking Regulatory Commission (CBRC).
Non-performing loans (NPLs) rose by 10.3 billion yuan (HK$12.6 billion) in the first three months to 438.2 billion yuan.
However, the NPL ratio - bad debt against total loans - fell slightly, by 10 basis points, from the end of December to 0.9 per cent, on the back of a growing loan base.
The deterioration in credit quality is the result of massive lending to infrastructure and property projects after the financial crisis in an effort to boost the economy.
That said, the government may again have to resort to a similar stimulative policy in the near to medium term as the country faces a slowdown and weak investment sentiment, worsened by sluggish exports.
The mainland's four largest lenders posted almost zero loan growth and lost deposits of about 200 billion yuan in the first two weeks of this month, an official newspaper reported on Wednesday.
Economists say that this time more monetary easing policies might not be enough to do the trick, as sluggish manufacturing activity and weak loan demand, rather than liquidity, are at the heart of the problem.
'Even though not the best solution for the long term, China might have to rely on launching more construction projects to lift the economy in the short to medium term,' said Yao Wei, China economist at Societe Generale .
Some bankers have said that in recent weeks they have been encouraged to lend more to water and power plants, a phenomenon some economists are worried about.
'Even till today we are still reflecting and bearing the consequences of the four trillion yuan stimulus plan; this time we should resort to plans that are less costly,' said Lu Zhengwei, chief economist at Industrial Bank, who has been advocating that China devalue its currency to help increase exports.
Over the long term, the mainland wants to rebalance its economy to make it more consumer-driven, even though that would mean slower growth. But in the short term, Beijing needs to safeguard growth and keep unemployment low, especially as the country goes through a once-in-a-decade leadership change.
Loosening the loan-to-deposit ratio requirement could be another way to increase bank lending, as banks' hands have been tied because of their thinning deposit base.
Depositors have been shifting their money into wealth management products as bank deposit interest rates fall short of inflation.
But CBRC vice-chairman Wang Zhaoxing said this week during a conference in Beijing that the agency had no plans to change the loan-to-deposit ratio of 75 per cent for banks.
Credit quality among Chinese lenders has been a key focus for the past two years. In the 1990s, a big round of policy lending led to substantial bad debts. NPLs were estimated at 35 per cent.
This time, even though massive rises in NPLs have not appeared on paper yet, debt migration from the rest of the economy on to the government balance sheet is starting to raise concern, Fitch Ratings said.