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Lend at least 450 billion yuan, banks told by China province as slowdown deepens

The banking regulator of the central Chinese province of Henan has told lenders to grant at least 450 billion yuan (HK$523 billion) in new loans this year to help shore up the local economy, a rare edict that has raised concerns the local government is becoming increasingly intrusive in influencing bank business decision-making amid the economic slowdown.

The instructions were issued by the Henan branch of the China Banking Regulatory Commission and posted on the website of the Henan government on Sunday. It came at a time when bad debt risks are rising for Chinese banks and the corporate leverage ratio is deemed at a risky level.

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The Bank of International Settlements published a quarterly report on Sunday saying China’s first-quarter “credit-to-GDP gap”, a measure of credit vulnerability, was three times higher than the danger line. The reading was also higher than the levels in East Asia before the 1997 Asia Financial Crisis or in the United States before the outbreak of the 2008 financial crisis.

It was also reminiscent of financial practices in the 1990s, when Chinese bank branches were asked to bankroll local government projects – a practice that resulted in massive bad debts and forced Beijing to use public funds to bail out state banks.

“It is rare to see a singled-out concrete credit scale target nowadays,” said Lian Ping, chief economist at the Bank of Communications, the country’s fifth-largest lender. “It would probably be hard to say that the credit scale target doesn’t involve intervention by the local government.”

Lian said he didn’t expect other provinces to follow the lead of Henan in setting provincial credit targets as such targets are not in line with Beijing’s current macro-economic policies. China now uses targets of M2 growth, a broad measure of money supply, and total social financing growth, both of which are set at 13 per cent for this year, in steering its monetary policy for economic growth.

On a nationwide level, China’s central bank has played down the loan target as it is regarded as not being adequately oriented to the market.

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“China’s practice of guiding credit scale is rare when compared with other markets,” said Suan Teck Kin, a senior economist at the United Overseas Bank. “It should be banks’ own decision to make on their lending plan, rather than following orders from the regulator.”

Telling banks how much they should lend could bring additional risks to bank loan books, especially when the economy is experiencing a downside trajectory, he said.

Henan, one of China’s major coal mining provinces, is under pressure to phase out its polluting and obsolete coal mining capacity and secure new growth engines. The non-performing loans ratio in the province was 3 per cent at the end of 2015, higher than the national average and 1.3 percentage points higher than its ratio at the end of 2014. Outstanding bad loans nearly doubled to 95.8 billion yuan by the end of 2015, according to data from the People’s Bank of China.

The 450 billion yuan loan target set by Henan, a province of 95 million people, marks only a 7 per cent increase from the loan size in 2015. Banks in Henan have already extended 379.3 billion yuan of new loans in the first eight months of 2016, or 84 per cent of the overall 2016 target, according to central bank data.

A steady flow of bank credit is needed by Henan to keep local growth on track. Henan’s GDP growth rose to 8 per cent in the first half of the year, up 0.2 percentage points from a year earlier.