Chinese shares finished the week down sharply on Friday and lower for the week overall after the country’s senior banking regulatory issued a rather direct warning on the increasing risks from the country’s credit boom.
But in the now usual way of seemingly sending more than one message, a senior Chinese Communist Party policy group also said there would be no change to current policy, continuing the pretence that regulators are not cracking down on bank lending, sort of.
The Shanghai Composite Index fell 3.2% to 2,962.67 on Friday while the Shenzhen Component Index dipped almost 4%, or 496.21 points, to end at 11,977.40. Hong Kong’s Hang Seng Index fell 0.7% as a response.
After a 2% rise on Thursday, the markets turned lower to send them into the red for the week overall by almost 1%.
So far this month, the Shanghai market had risen 15% up to Thursday.
Friday’s fall came after a warning from, Liu Mingkang, chairman of the China Banking Regulator Commission that the boom in bank lending so far this year is increasing risks for the nation’s banks.
It’s not the first time he and his body have warned of the dangers that could flow from the lending boom.
Lending surged in the first half of this year to a record $US1.1 trillion after the People’s Bank of China scrapped quotas limiting credit last November to support the government’s $586 billion stimulus package, raising concerns that excess cash in the banking system has created asset bubbles.
Lending slowed in July and then picked up again in August, to the surprise of many analysts, including locals.
The Shanghai market index slumped 22% last month on concern new government rules would cut lending at the same time as banks were reining in credit.
New loans in July were less than a quarter of June’s level, but the rise in August was substantial.
The head regulator urged the country’s lenders to improve their internal management. by improving their risk management and stick to regulatory requirements to reduce worries over financial risks caused by rapid credit growth this year.
"With bank loans growing rapidly, all kinds of risks are rising in the banking industry", Mr Liu was quoted as saying by Saturday’s China Daily.
“Banking institutions should always stick to the bottom line of compliance management, to lay a solid foundation for risk management.”
Liu’s comments came at a conference in Shanghai and were in response to wide concerns of rising default risks at banks and asset bubbles in the capital market, sparked by a surge of new loans in the first eight months which reached about 8.15 trillion Yuan (1.19 trillion US dollars), 164% more than the 4.91 trillion Yuan credit for the whole of last year.
China Daily said that Mr Liu told the conference that the global financial crisis has triggered a worldwide reflection on overhauling the financial supervision system, which includes revising and improving rules on capital adequacy, provision, leverage ratio, and liquidity, as well as corporate governance and compensation system.
He said the Chinese banking sector should strengthen their compliance management and get prepared to follow up the upcoming changes among the global financial institutions.
These issues will be discussed at the Group of 20 meeting in the US this week at which China is expected to be a major contributor.
Many Chinese banks have promised to slow down lending in the second half after the banking regulator urged domestic banks many times to ward off possible risks.
New lending eased in July which saw new loans of 356 billion Yuan, but rose to 410.4 billion Yuan in August (still well down on the frenetic rate in the first five months of the year).
But while the regulator was urging caution and improved risk management, the Communist Party pledged to maintain its proactive fiscal policy and a moderately loose monetary policy as the country’s economy is at a critical moment for recovery.
The Communist Party of China (CPC) Central Committee vowed Friday, at the closing of the Fourth Plenary Session of the 17th CPC Central Committee in Beijing, that the country would continue with macroeconomic policies to cope with the global financial crisis.
The reason why this debate is important is that the economic recovery in China, which we in Australia have hitched ourselves to, has been fuelled by the flood of credit from the state-controlled banks since late in 2008.
This has prompted fears of fresh bubbles forming in the property and equities markets and raised the prospect that growth could falter as lending returns to a more sustainable level.
Real estate is on the move with prices up 2% in many big cities in August from July and stories abound of huge sums being paid for prime commercial land in Beijing and other big cities.
The CBRC has, in recent months, demanded that banks increase the money they hold in reserve to cover bad loans and monitor whether their loans are being diverted into speculative investments in stocks and property.
Chinese banks are required to maintain a minimum capital adequacy ratio of 8%, but the CBRC has ordered most banks to raise their reserve funds to 10%.
Many economists say the stimulus impact will fade in early 2010, unless the government continues it by extending many of the measures
