Beijing’s Latest Mixed Signal Bodes Poorly for Banks 中央政府最新政策预示对银行不利

By newsdoug on February 20, 2012

Beijing sends latest mixed signal to banks China’s big banks are no doubt suffering new headaches these days after learning over the weekend that Beijing has lowered their reserve requirement ratios, in the latest of a growing series of mixed signals as the government tries to maintain the health of both the banks and the broader national economy at the same time. The latest announcement has seen the banking regulator lower the amount of money that banks must keep in reserve, in a clear signal that the government wants them to lend more to help China maintain its economic growth that has shown recent signs of slowing sharply. (English article) The cut was the second in the last 3 months, and could add up to 400 billion yuan to China’s financial system as Beijing tries to boost domestic consumption to offset a sharp slowdown in exports due to weak demand from the key US and European markets. Analysts forecast the regulator could lower the reserve requirement ratio again this year, again in a bid to stimulate growth. The only problem in all this is that Beijing has taken away many of the banks’ most important channels for new loans, meaning they could find it difficult lending all of the new money being freed up by the regulator’s moves. Beijing remains determined to cool the nation’s overheated property market, meaning the banks won’t be able to use the new funds to make more mortgage loans that are one of their most important sources of new lending. At the same time, banks also won’t be able to make many new loans to local governments for infrastructure projects, as most of those local governments are already struggling to repay massive loans they took out for similar projects under Beijing’s 4 trillion yuan economic stimulus plan at the height of the global economic crisis in 2008 and 2009. Many of those local government loans are already showing signs of problems, leading reports to emerge last week that Beijing was considering a plan to allow banks to delay collection of repayments for as much as 4 years. (previous post) Exporters aren’t likely to need new funds from the banks either, since many are seeing demand rapidly fade for their products. One of the few sources that could actually use the funds are small- and medium-sized companies that cater to the domestic market, many of which generally suffer from a lack of access to credit and are forced to look to gray markets for their money. But with their history of lending to big state-run firms, China’s big banks have little or no experience making loans to these smaller companies and thus currently lack the channels to make them an important source of new lending. As a result of all this, the banks may have a difficult time boosting their lending despite Beijing’s wishes. One of the few remaining outlets for loans is the stock market, which means we could see a rally in stocks for the first half of the year as new funds flow into the market. But any such rally will probably be short lived, leading to new problems as many loans to stock buyers could also start to go bad. On the whole, the situation for the banks doesn’t look very good in the next year, as many will be forced to making questionable loans in unfamiliar areas in their drive to fulfill Beijing’s wishes for more lending.

Bottom line: Beijing’s latest move to boost lending bodes poorly for the nation’s banks, which are likely to make dubious loans in their quest to fulfill the government’s wishes.

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