Mainland bank loans may fall as liquidity tightens

PUBLISHED : Friday, 03 February, 2012, 12:00am
UPDATED : Friday, 03 February, 2012, 12:00am


Mainland banks' liquidity is likely to continue tightening in 2012 despite a recent cut in the reserve requirement ratio (RRR), and new loans may fall to 16.5 trillion yuan (HK$20.31 trillion), from an estimated 17.5 trillion yuan, a rating agency warned yesterday.

Charlene Chu, a senior analyst at Fitch, said that the RRR cut was more to enable banks to mobilise their own funds to extend credit. Cuts in the RRR allow banks to put aside less capital for reserves, freeing up cash for lending, but do not equate to a cut in banks' lending rates.

However, Chu said the central government might consider another round of RRR cuts. Of the estimated 16.5 trillion yuan in new lending, 9 trillion would be earmarked for new yuan and foreign currency loans.

Chu also expected the government to continue to discourage banks from issuing new shares when their stock prices were underperforming the sector's growth.

Fitch would continue to monitor smaller mainland banks which might continue to struggle with liquidity, and might face downgrades, she said.

Clara Lau, group credit officer for rating agency Moody's, said in a separate report that overall capital costs in Asia would rise this year.

A combination of credit tightening caused by asset sales in developed markets' banking systems, plus a lack of appetite for lower-grade high-yield corporate bonds would make loans more difficult and expensive to obtain, she said.

Lau also said the negative ratings trend among Asia corporate bond issuers would continue into this year, especially in sectors like mainland property development, oil refining and marketing, and the technology and semi-conductor sectors. She expected more corporate issuers to default this year, compared with 2011.

Issuers reliant on exports, in need of short-term financing, or undergoing large, debt-funded expansion would also be at greater risk of downgrade this year, as demand from the West slowed down.

Terry Chan, Standard & Poor's credit analyst, said the slowdown in the mainland's own economic growth would also have a big impact on credit ratings.

While the rating agency believed the mainland would achieve a soft landing of 8 per cent growth, there was still a one-in-four chance that it might have a 'medium landing' of 7 per cent, and a one-in-10 risk of a hard landing of 5 per cent, Chan said.

If mainland growth should fall below 8 per cent this year, it would cause defaults and downgrades in various sectors at home, especially real estate development and local government, Chan said.

'We consider that [the] more highly-rated real estate issuers should be able to endure a significant slowdown,' Chan said. 'However, those rated in the 'B' rating category would be most vulnerable, especially in a hard-landing scenario, with their inherent liquidity challenges possibly causing some to default.'