China stock market

Beijing’s new lending targets for private firms send China bank stocks diving

  • Financial regulator mulls requiring banks to allocate 50 per cent of new loans to the private sector in three years
PUBLISHED : Friday, 09 November, 2018, 3:46pm
UPDATED : Friday, 09 November, 2018, 11:29pm

Chinese banking stocks tumbled on Friday after China’s financial regulator outlined targets for banks to increase lending to private companies to boost confidence in the strained sector.

The China Banking and Insurance Regulatory Commission was considering making it a target for banks to allocate least 50 per cent of new corporate loans to private firms in three years, the commission head Guo Shuqing said in an interview with state-owned newspaper Financial News on Thursday.

Guo also said banks should assess borrowers on a case by case basis, and not simply cut off the loans when these private companies run into financial or operational troubles.

The regulator’s intent sent banking stocks falling, as investors, worried about the potentially increasing credit risks and bad loans, dumped their holdings.

A gauge of the 27 domestically-listed Chinese banks plunged 3.2 per cent on Friday, weighing down the benchmark Shanghai Composite Index by 1.4 per cent, or 36.76 points, to 2,598.87.

“Private companies are the riskiest borrowers,” said Kingston Lin King-ham, director of securities brokerage AMTD.

“This target is good news to private companies, but is also very likely to have a negative impact on banks’ credit assessment and risk control.”

Bank of Shanghai plunged 5 per cent to close at 11.52 yuan, China Merchants Bank declined 4.7 per cent to 28.60 yuan, and China Construction Bank, one of the four largest banks in the country, was down 3.6 per cent at 6.72 yuan.

This target is good news to private companies, but is also very likely to have a negative impact on banks’ credit assessment and risk control
Kingston Lin King-ham, AMTD

On top of the three-year target, at least a third of new loans issued by large banks should go to private companies for now, while the target for smaller banks was at least two thirds, Guo said.

The latest announcement came after Chinese President Xi Jinping promised that Beijing would protect and help the businesses of private entrepreneurs last week, amid mounting doubts over the country’s stance towards the sector that has been struggling with heavy taxes and slumping markets.

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China’s banks have been reluctant to lend to private companies and smaller firms despite repeated government encouragement and policies.

Loans to private companies only account for a quarter of all outstanding loans at the moment, while such companies contribute to over 60 per cent of China’s economy, Guo said.

“The banking industry should provide lending support to the private economy in proportion to its contribution to the national economy,” Guo was quoted by Financial News as saying.