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Where Did that 7 Trillion Yuan Come From?

07-30 15:39 Caijing

A close look at China's first-half lending surge shows how the Big Four banks blazed a credit trail that many others followed.

By staff reporters Wen Xiu, Zhang Man and Fang Huilei

(Caijing Magazine) The deputy governor of the People's Bank of China set market watchers chattering June 13 by calling for credit lending control along with a relaxed monetary policy. Li Dongsheng also urged financial sector stability.

But while Li spoke, the nation's banks were continuing to issue new loans at a furious momentum, doling out 1.53 trillion yuan in June alone.

The June credit outlay by Chinese banks brought total lending for the first half of the year to a record 7.37 trillion yuan -- 2.3 times the amount of loans issued during the same period last year.

Joint-stock banks wrote some 2 trillion worth of new loans during the period, and loan officers at small- to medium-sized banks have been especially busy since May.

Regional commercial banks issued a total 543 billion yuan in new loans between January and June, with medium- to long-term loans accounting for nearly half. Rural credit unions reported nearly 500 billion yuan in new lending, more than 60 percent of which were short-term loans.

But the nation's leading lenders were China's Big Four state-owned banks – ICBC, China Construction Bank, Agricultural Bank of China, and Bank of China. Their combined lending spree for the six-month period totaled more than 3.47 trillion yuan, according to industry statistics obtained by Caijing.

Four-Way Competition

Bank of China led the foursome by issuing more than 1 trillion yuan in new loans during the first half 2009. That was almost five times its 2008 total, allowing the bank to double its share of the country's loan-writing market to 14 percent.

Chinese banks are known to compete for loan-writing business toward the end of each quarter, and sometimes toward the end of the month. The practice is tied to the fact that asset and market share are major criteria for assessing bank performance in China, which encourages banks to expand.

An end-of-month scramble was evident in March, when Bank of China, ICBC and Agricultural Bank of China each wrote an average 90 billion in new loans over the last two days of the month.

Bank of China was especially interested in writing loans to strengthen its domestic market. That's because the bank, whose primary business involves foreign exchange, was negatively affected by the global financial crisis.

A central bank decision to relax monetary policy in the second half 2008 was seen by Bank of China as an opportunity for expansion. But the loan-writing went too far in the government's eyes, and as a consequence the central bank ordered Bank of China to buy its notes in mid-July to soak up some of its liquidity and rein in its lending excess.

Another bank seeking a bigger market was Agricultural Bank of China, whose new loans in the first half of the year totaled 858.8 billion yuan -- four times the amount issued by the bank in the same period last year.

Meanwhile, China Construction Bank's lending soared in the first quarter 2009 but then tightened in the second quarter, as newly issued loans dwindled to a mere 79 billion yuan in June. The bank's total yuan-denominated loans stood at 709 billion yuan for the first half.

ICBC, China's largest bank, issued only 64 billion yuan in loans in June but closed its first half lending at 864.6 billion yuan, including foreign currency loans.

Banks' foreign exchange lending has stirred some concerns. Central bank statistics July 15 said the balance of foreign exchange loans by all Chinese banks' at the end of June was US$ 295.4 billion, up 8 percent year-on-year. Most of the increase came in May and June. In particular, foreign exchange debt soared by US$ 37.2 billion, an increase of US$ 35.8 billion year-on-year.

Anticipation over a possible deprecation of the yuan at the beginning of the year encouraged some companies to delay their settlement from foreign currency to yuan, and as a result lowered their demand for foreign exchange loans, according to a senior executive at a state-owned bank. But in May and June, these types of loans soared over fresh anticipation over possible yuan appreciation.

New Force

Following the surge in Big Four lending early in the year, a new credit team appeared on the scene around May. In that month, medium-sized joint stock commercial banks, policy banks and city commercial banks became the driving force for lending growth.

For policy banks, newly issued loans for the first half year totaled 750 billion yuan. China Development Bank represented more than 70 percent of that amount, mainly with medium- to long-term loans.

According to central bank data, joint-stock banks including Bank of Communications issued a combined 2 trillion yuan in new loans during the first six months of the year – quadrupling their loan levels from the first half 2008.

Joint-stock banks that issued more than 200 billion yuan between January and June included Bank of Communications, CITIC Bank, China Merchants Bank, Minsheng Bank, and Shanghai Pudong Development Bank.

New loans issued by Bank of Communications totaled 415.5 billion yuan in the six-month period, with medium- to long-term loans representing nearly half. CITIC Bank also was aggressive, lending 324.6 billion yuan. CITIC bank issued twice as many short-term as medium- to long-term loans.

A branch manager for the regional, Beijing-based Huaxia Bank said many joint-stock banks did new loan business in rural markets or found other ways to diversify in recent months. Some wrote loans to meet the needs of government-driven investment projects in towns and third-tier cities. Others tried to participate in syndicated loan programs.

Lenders with the fewest credit customers in the first quarter included small- to medium-sized banks. A regional credit manger at a joint-stock bank said most of the 5 trillion yuan in new credit issued nationwide during the first quarter was "issued by the Big Four. Smaller banks were not as competitive in getting business."

However, business for the smaller banks picked up considerably in May and June.

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