Mainland's bankers face reckoning over easy credit

PUBLISHED : Sunday, 18 April, 2010, 12:00am
UPDATED : Sunday, 18 April, 2010, 12:00am

The head of the world's largest bank by market capitalisation does not mince words. Yang Kaisheng, president of Industrial and Commercial Bank of China, has warned the mainland's four biggest banks need a whopping 480 billion yuan (HK$545 billion) over the next five years to meet an expected capital shortfall. Their capital base has been depleted by last year's credit binge, ordered by the central government at the height of the global economic crisis. Now, it appears the bankers will have to face the music.

If there is any consolation, it is that the latest estimate is lower than the figure of 600 billion yuan thrown around early this year. But the sheer size of the estimated shortfall is still worrying; the banks may not be able to raise what will be needed from Chinese capital markets alone. Furthermore, the estimate may be conservative because it only factors in steady lending growth, normal net profit growth and the current level of capital adequacy requirements. All these can change rapidly if market conditions turn adverse.

Fortunately, the current environment is a good time to raise funds. ICBC, Bank of China and Bank of Communications all plan to sell convertible bonds and shares in Hong Kong and Shanghai while China Construction Bank has said it will follow suit. The real question is: can the banks manage to fill the gap on their own? If not, they will have to go to the central government for help.

Most banks, of course, can always slow lending when they don't have enough capital. However, the big mainland banks are not ordinary banks. The central government effectively mandates loan levels for them. In their case, it's not so much a matter of their being too big to fail, but that as quasi-state organs, they cannot fail. Unlike Washington, Beijing has more than US$2.4 trillion stashed away in foreign reserves, so no one can doubt its ability to prop up the banks.

Chinese leaders have gained new confidence as the economy became the first in the world to emerge from the economic maelstrom. It would be ironic if the government had to bail out the big banks at the tail end of the global crisis - just when Western banks, which precipitated the crisis, may be returning to profitability.