China’s banking system could face a resurgence of bad loans if the economy slows – but resources are in place to deal with any problems, Liu Mingkang, chairman of the China Banking Regulatory Commission told Emerging Markets yesterday.
Asked about the possible accumulation of new non-performing loans (NPLs), he said: “It could be.” But he added that banks can cope because they have “adequate reserves and provisions”.
Liu had earlier outlined five sets of measures China has taken to shore up the system after the last banking crisis, which left major Chinese financial institutions with huge volumes of NPLs. The situation has improved dramatically in recent years, Liu told the Institute of International Finance annual membership meeting.
He pointed to a huge increase in the number of banks meeting capital adequacy requirements, from just 8% in 2003 to 53% in 2005; a dramatic decline in leading banks’ NPL ratio, from 23% in 2002 to 7.8% in the early part of this year; and a reduction of the shortfall in provision against NPLs, from 1.6 trillion yuan in 2002 to 623 billion yuan by early 2006.
“China’s strong growth has been favourable for banking reform,” Liu told the IIF meeting. He also pointed to the build up in China’s foreign exchange reserves, now the largest in the world, to more than $900 billion.
“This improves our ability to deal with any shocks,” Liu added. Bank of China chairman Xiao Gang claimed at the IIF meeting that “China’s economy is not overheating in general.”
China could use part of its reserves to deal with any new bad loan problems, Goldman Sachs International vice chairman Robert Hormats told Emerging Markets. America did the same thing in dealing with its Savings and Loan crisis in the 1980s, said Hormats, a former US assistant secretary of state for economic and business affairs.
“But it is not a good idea to get addicted” to such measures, he added, noting that China had already used reserves once to bolster banking capital. Liu promised that China will “fully honour our WTO commitments” and give foreign banks operating in China “fully equal treatment with own banks” by the end of this year.
Remaining restrictions on the operations of foreign banks in China will be “phased out” between now and then, he said. Meanwhile, new opportunities will open for foreign as well as domestic banks as China’s banking system expands. The private sector is “playing an important role in restructuring China’s banking system.”
He cited China’s huge potential for the growth of consumer lending. Although this has expanded rapidly in recent years, consumer loans still only equal 14% of GDP, which is low by international standards.
Mortgage lending in particular, at 11% of GDP, is very small, compared with 59% in South Korea and 33% in Singapore. More firmly enshrined rights of property ownership in China will help the growth of this sector, he suggested.
Liu also noted the expanding scope for financial derivatives business in China as the country prepares to liberalize its foreign exchange regime. There is also potential for corporate lending, especially for small and medium size firms which account for 60% of total industrial output and exports and for 75% of employment.