Learning to lend beyond the industrial blacklist
Mainland banksare grappling with income losses from interest rate deregulation and a much narrower field of suitable loan candidates
To whom to lend - this is a tough question for mainland banks.
The blacklist of industries subject to lending controls has grown longer, thanks to their rampant expansion in the past few years, fuelled by excessive liquidity after the 2008-09 global financial crisis.
Among those listed by banks in their financial reports last week were many industries grappling with overcapacity: steel, cement, coal, chemicals, plate glass, wind-power equipment, polysilicon and shipbuilding. If local government financing vehicles and property developers - two sectors singled out by regulators for mounting default risk - are excluded, the number of suitable candidates for loans has substantially narrowed.
Mainland banks, which are used to lucrative interest rate spreads contributing the bulk of their income, are being forced to transform by the industrial headwinds and unfolding deregulation of interest rates.
The Ministry of Railways, among the mainland's biggest borrowers, ceased to exist under the restructuring scheme Beijing approved last month.
Liu Shiyu, vice-president of the People's Bank of China, said total railway lending from banks amounted to 1.4 trillion yuan (HK$1.73 trillion) at the end of last year. The newly established China Railway Corp has taken on the ministry's debt.
Without the endorsement of a ministry, new loans to the sector would warrant more meticulous consideration, given the poor operating results of the rail business, bankers said.
The recent bankruptcy of Suntech Power, based in the eastern province of Jiangsu, put several big lenders under the spotlight. The dramatic reversal in a company that was a leading force in the country's fast-growing renewable energy industry was due to industrial overcapacity combined with sluggish global demand, and exacerbated by overseas anti-dumping penalties. At the end of February, nine banks' outstanding loans to Suntech totalled about 7.1 billion yuan.
Bank of China, one of the largest lenders to the solar sector, had booked all of its loans to Suntech as non-performing loans, the bank's senior executives said last week.
"Major banks are trying to get rid of administrative orders and discard risky credits to some poor government enterprises," said Yi Xianrong, a researcher at the Chinese Academy of Social Sciences.
"When they look into private companies and compete with peers under a more flexible interest rate regime, banks' risk management capacity is under test."
Non-performing loans at the five largest banks climbed to 327.48 billion yuan at the end of last year, equivalent to 42 per cent of their profits for the year.
Many banks said bad loans rose especially sharply in the Yangtze River Delta, a hub for private companies. Exporters in the coastal area were severely hit by weak external demand and higher labour and land costs at home.
Credit losses did not deter the banks. Weak in providing intermediary services, mainland banks have unanimously expressed their willingness to give small companies better lending support, eyeing higher margins than they can earn from loans to state-owned enterprises and established large firms.
Industrial and Commercial Bank of China (ICBC) said its new loans to small and medium-sized enterprises accounted for 89 per cent of its corporate loans last year, while China Construction Bank (CCB) said outstanding loans to small companies grew 18 per cent over last year.
And the banks are keenly looking for expansion opportunities overseas.
CCB said it had accelerated "overseas deployment". ICBC chairman Jiang Jianqing's accompanied President Xi Jinping on his visit to Africa last week, a move widely regarded as a sign of the ongoing interest of mainland banks in tapping the African market. ICBC is the controlling shareholder of South Africa's Standard Bank.