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THE CHINA COLUMN: Could credit defaults cause a talent crisis?

If last year saw a lending boom for the Chinese banking industry, this year’s theme is clearly capital raising. ICBC recently proposed a massive rights issue in both Shanghai and Hong Kong. Earlier this month, Agricultural Bank of China successfully listed on the Shanghai and Hong Kong stock exchanges, raising US$22bn.

In fact, ICBC is the last among a fleet of major Chinese lenders to raise capital. State-owned rivals Bank of Communications, China Construction Bank, and Bank of China have already launched plans to raise money from debt markets. Official statements describe the purpose of these activities as “to ensure healthy development of their business, boost competitiveness, increase their ability to handle risks, and sustain profit growth.”

The truth, however, according to rating agency Standard & Poor’s, is that Chinese banks will be facing rising bad-loan losses in the next few years as economic growth slows and local government investment vehicles struggle to repay their debts. The capital-raising activities are, more accurately, the banks’ solutions to meet the China Banking Regulatory Commission’s (CBRC) minimum capital adequacy ratio.

Bad loans, big talent problem?

The real question is what will happen if those bad-loan losses materialise? Bankruptcy of China’s Big Four is incredibly unlikely as they are all state-owned, but a potential talent-erosion is not out of the question.

“I would definitely consider leaving if our bank suffers too much from the credit defaults in the years to come because it’s not only going to damage our bank’s reputation, it will seriously affect our normal operations and business expansion,” comments J.C, a senior banking official at China Construction Bank, who asked not to be named.

But he adds, more optimistically: “So far I don’t see a direct impact on the back of potential loan losses. We will see what’s going to play out in the near future.”

According to New Century Weekly, about 23 per cent of the US$1.4tn that Chinese banks have lent to local government financial vehicles are at serious risk of default. Local governments had been on a construction spree because Beijing wanted to boost the economy in the face of the global financial crisis.

Words of warning

Since the beginning of this year, however, top Chinese bankers and regulators have been warning that a massive amount of the loans used to fund the infrastructure spending and property boom could go bad. This is also partially because Beijing has recently launched tightening measures to cool the overheating property market.

The head of the CBRC’s Shanghai bureau, Yan Qingmin, said in a recent interview that more property loans were categorised as “special mention” in the second quarter, indicating developers’ weakening ability to repay.

Standard & Poor’s predicts that if 30 per cent of loans to local government investment vehicles become irrecoverable, it would add four to six percentage points to the overall non-performing loan ratio at the banks. Major Chinese lenders might be able to keep the impact to a manageable level because of their stronger credit risk controls, but small banks would struggle due to their lower profitability.

Talent-erosion is not just a concern to Chinese banks, it is a major potential problem across industries which rely heavily on loans to boost and expand their businesses. As Beijing keeps curbing lending to cool the over-heating property sector, the money supply in capital markets will be drained at a rapid pace.

With less liquidity and less means to get the loans necessary for normal operations, businesses would be facing critical liquidity issues. Layoffs might be only a matter of time. In general, this is more like a vicious cycle across different industries than merely a problem for the banks.

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Comments (1)

  1. China’s loans are not going to be an issue. Beijing’s measures to curb lending and control the markets are very efficient and effective. It’s not the same case as the western world

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