China central bank warns of bad loan ratios as slowdown continues

Economic growth prospect is facing 'full of uncertainties' according to top official

PUBLISHED : Saturday, 13 October, 2012, 12:00am
UPDATED : Saturday, 13 October, 2012, 5:19am

The People's Bank of China is "concerned about" a rise in banks' bad loan ratios amid a continued economic growth slowdown.

Banks' asset quality was closely linked to the economic situation, deputy central bank governor Liu Shiyu said yesterday in Beijing. He added that the prospect of economic growth was "full of uncertainties".

Weak industry demand and regulators' concern about deteriorating loan quality resulted in sluggish loan growth last month, indicating the world's second-largest economy is unlikely to show a marked rebound anytime soon after six consecutive quarters of shrinking growth.

Financial institutions extended 623.2 billion yuan (HK$770.8 billion) of new loans last month, the second smallest monthly lending so far this year and below the 703.9 billion yuan issued in August, central bank data showed yesterday. In the first nine months of the year, new loans totalled 6.72 trillion yuan.

"Credit overall is not growing at a speed likely to fuel a significant economic rebound," said Capital Economics analysts in London.

However, accelerating growth in non-bank financing, such as banks acceptance bills and trust loans, may offer some support to local governments' enthusiastic infrastructure investment.

In the first three quarters, new trust loans reached 701.5 billion yuan, up significantly from merely 83.9 billion yuan in the same period last year. Net sales of corporate bonds reached 1.56 trillion yuan, an increase of 718.6 billion yuan from a year earlier.

"It seems that demand for both liquidity and investment funding is turning to non-bank sources, which keeps overall credit growth faster [than] the nominal GDP growth," said Yao Wei, a China economist for Societe Generale.

Economists said the economy might recover mildly in the fourth quarter as investment gradually picked up.

Still, a sharp rebound is unlikely. The World Bank has lowered its forecast for China's growth this year to 7.7 per cent from the 8.2 per cent predicted in May, citing sluggish export and investment activities.

The slowing growth has hurt companies' profitability and caused a rise in bad loans in the second quarter.

Overdue loans, or those not yet classified as bad but that may sour in the future, shot up by 112.88 billion yuan to 488.97 billion yuan between the end of last year and the end of June.

While asset quality at large state-run banks remains sound, there are concerns about weaker, smaller lenders.

Banks in Wenzhou, a hub for small businesses and exporters in Zhejiang, reported a 12th consecutive month of rise in average non-performing loan ratio at the end of August to 3 per cent, the China Securities Journal said.