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China banks plunge on concern lending targets are a step too far

Fin24 2018-11-09 12:15:30

China’s biggest banks dragged down the stock market on Friday as investors took a dim view of the government’s unprecedented move to tell firms exactly how much they must lend to the country’s struggling private sector.

At least a third of new loans should go to non-state companies, Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission, said late Thursday. Private lending was less than a quarter of banks’ outstanding debt in September.

Publicly setting targets reflects policy makers’ urgency as they try to stem China’s economic slowdown amid an escalating trade war, record corporate defaults and a plunging stock market. While they may be achievable, concerns are mounting among analysts and investors that regulators have put too much pressure on banks to work with the embattled private sector, and as a result more bad loans will ensue.

“There is desperation among regulators, and sometimes muddled polices are difficult to avoid under this kind of pressure,” said Jiang Liangqing, a Beijing-based fund manager at Ruisen Capital Management. “Investors are voting with their feet.”

This is the first time China has set formal goals for private lending, a step it refrained from even during the financial crisis of 2008. However, the stimulus package it implemented at the time swelled bad debt levels, which now threaten to swallow any new money poured into private companies. Non-state firms defaulted on 67.4 billion yuan of local bonds this year, 4.2 times that of 2017, data compiled by Bloomberg show.

A tough few years 

Banks, too, have had a tough few years. Capital strength has weakened across the sector, with dramatic declines at some smaller lenders, and loan-to-deposit ratios swelled to the highest level in at least seven years. Falling stock markets have made it harder to raise fresh capital, prompting lenders to prefer the perceived safety of state-run borrowers.

Now, big banks will need to push a third of new loans to private firms, Guo told the Financial News. The target for small and medium-sized banks is higher at two-thirds. Guo also asked that loans to private companies account for at least 50% of total new corporate lending in three years.

Banks paced a 2.4% drop in Hong Kong’s main stock index as of 12:38 pm local time. Lenders also fell in China.

“We think the targets are quite achievable,” analysts at Huatai Financial wrote in a note to clients on Friday. However, the move is negative for short-term sentiment as “it will likely increase market concerns on banks’ ‘civic duty’ and potential increase in their non-performing loan ratio,” they said.

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