Cloudy with a Chance of Torrential Credit

Delayed Risks

During the Central Economic Work Meeting, an intense dispute erupted between central and local levels and between decision-makers and commercial banks as to the scale of new loan growth for the year. In the end, the conference set new loan growth at 7.5 trillion yuan and stated that the flexibility and focus of control policies would be strengthened.

Asked about public concerns regarding a loss of control over full-year credit growth, an authoritative source said that monetary authorities had sufficient measures and capability to ensure control over new loan issuance and that the two departments would be taking a multi-pronged approach to ensure that the total would not exceed the quota. But the effectiveness of controls will be evaluated based on loan quality. The difficulty for regulators is to support economic development while controlling the expansion of credit risks.

One high-level regulator expressed worries about the hidden risks of massive lending, "Even if loans make it to the real economy, will they necessarily be collected? Will there really be enough cars on those new highways? Will there be enough passengers for all the new airports?"

The regulator admitted that a number of potential risks would gradually appear after the surge of credit in 2009 reaches its destination. Controls need to be implemented in advance, as exposure of problems would be delayed.

The Big Four banks all predict that they will become super-banks with assets of over 10 trillion yuan this year but insist that this scale will not be achieved through mergers and acquisitions but rather from organic expansion. China's reliance on credit for economic development has already reached unprecedented levels, and the risks should not be underestimated. The ratio of the M2 money supply to gross domestic product, a major indicator of the national economy's reliance on monetary policy and credit issuance, continues to move upward, and has reached the rarely seen level of 160 percent.

"This means China's use of credit to drive the economy has reached a maximum, and continuing the policy could be counterproductive. The excessive accumulation of credit risk will inevitably result in non-performing loans in the future," a senior official at a state-owned commercial bank said.

On January 26, the CBRC will convene the fourth-quarter economic situation analysis meeting, at which point regulators are expected to produce more detailed regulatory measures.