Business

China’s commitment to a loose monetary policy will likely generate as much as 8 trillion yuan (US$1.17 trillion) in new loans this year - well above the 5 trillion yuan target, analysts said.

Though the expanded credit could help turn around declining economic growth, some analysts see potential pitfalls on the horizon. The surge in loans together with expected strong growth in investment by the government and businesses will challenge the country’s ability to combat asset bubbles and industrial overcapacity, economists said.

It will also put greater pressure on the long-term credit quality of the commercial banks, they added.

China will maintain a relaxed monetary policy and ensure sufficient liquidity in the banking system to sustain economic growth, the People’s Bank of China said in a statement on Sunday.

The message dampened speculation that the central bank may step in to restrain credit after data showed on Saturday that fresh yuan-denominated loans and money supply surged to record levels last month.

“The credit growth was out of everyone’s expectation,” said Gao Yi, a senior macroeconomic analyst at Orient Securities. “Now it’s clear. The central bank won’t tighten in the second quarter or even in the third. That means credit growth can hit 7 trillion to 8 trillion yuan this year.”

Banks in China extended a record 1.89 trillion yuan in domestic-currency backed loans in March, bringing total new credit for the first quarter to 4.58 trillion yuan. That’s close to the government’s target of at least 5 trillion yuan for the whole year.

Thanks to the explosive credit expansion, M2 money supply, which includes all cash and deposits, jumped by a record 25.5 percent last month, compared with a government target of 17 percent.

The central bank said in the statement that it will “maintain continuity of its present monetary policy and ensure that money supply is sufficient to meet the needs of economic development.”

The tone may indicate that, although there was better-than-expected performance in the first quarter and liquidity was plentiful, the government is still concerned that conditions are fragile and the external environment will remain troublesome.

“It’s a really difficult challenge to run monetary policy right now,” said Stephen Green, head of China research at Standard Chartered Plc. “If you tighten too early, you risk choking off the recovery. But if you tighten too late, you run the risks of asset bubbles developing again and a lot of wasted investment.”

Other analysts also fear that if banks don’t increase oversight of loan approvals, credit quality may deteriorate as debt is dished out too quickly and some of the money may sneak into the stock market.

“Under such extremely hot conditions, we have doubts about the banks’ abilities to manage the overall loan quality and to ensure that the money will be used in an efficient way,” said Wu Ke, an analyst at the Zhongtian Investment Consulting Co.

Analysts are now playing down the need for imminent reductions in lending rates and banking reserve ratios, but they did say rate cuts are still possible in the second quarter as preemptive government measures to prevent deflation.

“The recovery is still very fragile now. We think the government will maintain relaxed macroeconomic policies for the next few quarters,” Goldman Sachs analysts Helen Qiao and Yu Song said in a note. “But if economic activity figures are lower than expected in the coming months, we expect interest rates to drop.”

(Shanghai Daily April 14, 2009)

France’s Societe Generale will open 50 new outlets in China in the coming years as part of an expansion in the market despite the global financial crisis, a senior bank official said in Shanghai.

“The bank will first expand into the affluent coastal areas, and we will also step-by-step expand into other cities (riding) on China’s big growth potential,” Frederic Blanc, managing director and deputy head of commercial and personal banking at Societe Generale (China) Ltd, told Shanghai Daily.

French bank eyes expansion in China [Xinhua]

Its parent company, which is France’s third-biggest bank, has given its string support to its Chinese subsidiary to expand business in China despite the global financial turmoil, Blanc said.

The French bank set up its locally incorporated subsidiary - Societe Generale (China) - in September with a registered capital of 4 billion yuan (US$586 million) in Beijing so that it could provide a full range of yuan services.

In line with the bank’s network expansion, it will at least double its number of staff in China. The bank now has about 500 employees in Shanghai, Beijing, Wuhan, Tianjin and Guangzhou. The bank opened an outlet in Guangzhou in Guangdong Province last month and will open a sub-branch in Shanghai’s Puxi area Monday.

The bank is expected to get the approval from the China Banking Regulatory Commission to offer retail yuan services to Chinese residents this year. It will launch new products such as yuan-backed individual mortgages, non-secured credit and more wealth management products once it obtains the yuan license.

The bank expects to launch yuan-backed debit cards in the first quarter of next year and is preparing for its bank card center in Beijing. It has already started negotiations with China UnionPay Co to join its clearing system.

(Shanghai Daily April 14, 2009)

China’s big four State-controlled banks will be the first batch to run their own insurance company in a pilot program, an official from the country’s banking regulator said at a forum on Saturday.

“We’ve reached agreement with the insurance regulator on banks to set up their own insurance companies, and the big four banks will be the first batch to run on a pilot basis,” said Lai Xiufu, an official from the China Banking Regulatory Commission (CBRC).

At a press conference in February, Li Kemu, vice chairman of the China Insurance Regulatory Commission, told reporters that there should be at least one insurance company launched by a bank approved this year. The two regulators have now reached a consensus on the regulatory framework.

(China Daily April 13, 2009)

China’s banking regulator said it will step up efforts to control risk management in Chinese banks as domestic lending continued to grow in March.

Chinese banks reportedly extended a whopping 1.87 trillion yuan worth of new loans in March, following record-setting lending growth in the first two month of this year.

The China Banking Regulatory Commission (CBRC) lifted annual lending quotas on domestic banks last November to boost economic growth amid the global financial crisis. Lending in Chinese banks has skyrocketed ever since.

The rise in March would bring the first-quarter figure for new loans to about 4 trillion yuan, close to the 5 trillion yuan lending target Premier Wen Jiabao announced at the National People’s Congress.

World leaders vowed at the London G-20 Summit to regulate financial firms more strictly in the wake of the global financial crisis. Although Chinese banks have largely been left untouched compared to their western peers, it doesn’t mean they’re in a risk-free haven, analysts said.

This year’s lending by Chinese banks has included a high proportion of discounted bill financing, generally used to meet companies’ short-term cash needs, fuelling speculations that much of the surge in loans may be funding stock market speculation rather than business operations or investment.

Chinese media reported earlier that the CBRC had begun auditing lending growth in Chinese banks to learn where the new loans actually ended up.

Authorities have forbidden commercial banks from transferring funds raised from discounted bills into deposit accounts, China Securities Journal reported. The paper also quoted a regulatory official as saying that the current increase in credit basically reflected the demands of the real economy.

Liu Mingkang, chairman of the CBRC, said that capital adequacy ratio and provision coverage ratio in Chinese banks has to meet the latest regulatory requirement, when speaking at a meeting held at the Chinese Academy of Social Sciences.

According to latest regulations from the CBRC, capital adequacy ratio in major domestic banks has to be higher than 12 percent while provision coverage ratio in those banks need to be improved to 150 percent by the end of 2009.

As at the end of 2008, capital adequacy ratio in the country’s top three State-controlled banks, Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB) and Bank of China (BOC), met the CBRC’s 12 percent requirement. But both ICBC and CCB have to raise their provision coverage ratio by about 20 percentage points to keep in line with the CBRC’s new regulation, while BOC’s provision coverage ratio has to be boosted by about 30 percentage points.

In addition, China will ask foreign investors to commit to a lockup period of five years or more when they acquire stakes in Chinese banks, as an effort to shield domestic banks from the impact of stake sales by overseas investors.

CBRC chairman Liu mentioned the new policy for the first time last week without giving details on when it would be implemented. In recent months, several foreign banks have sold stakes in Chinese banks to raise cash amid the global financial crisis, causing share prices of Chinese banks to fluctuate.

(China Daily April 13, 2009)

Pacific Securities announced Saturday that its net profit in the first quarter topped 112 million yuan (16.4 million U.S. dollars) due to the first-quarter upbeat stock market performance.

China’s benchmark Shanghai Composite Index has gained more than 32 percent from the beginning of this year.

This was the first quarterly report from the nine listed brokerage firms and analysts predicted that the securities firms performance was recovering.

Zhang Yunpeng, an analyst with Beijing-based Huarong Securities, told Xinhua on Sunday that brokerage companies benefited from the turnover increase and index rise in recent months as more economic recovery signs emerged, adding that this sector was still bullish in the long run.

The total turnover of the Chinese stock markets reached 9.44 trillion yuan from January to March this year, only 3.5 percent lower from a year ago.

The southern Yunnan-based Pacific Securities lost 645 million yuan last year, compared to a profit of 749 million yuan in 2007 when the domestic stock market was bullish.

(Xinhua News Agency April 12, 2009)

China Pacific Insurance, one of the country’s largest insurers, announced Saturday that its net profit dropped 80.6 percent to 1.339 billion yuan (196 million U.S. dollars) in 2008.

The Shanghai-based insurer attributed the profit decrease to the sluggish stock market performance and the large amount of insurance indemnity after several natural disasters last year.

However, the premium income of the company rose 26.6 percent to 94.02 billion yuan, said the firm in its 2008 annual report.

Its life insurance premium income increased 30.4 percent to 66.09 billion yuan last year, ranking the third in the domestic market. Its property insurance premium rose 18.7 percent to 27.88 billion yuan, making it the second largest among its peers.

(Xinhua News Agency April 12, 2009)

Shanghai Pudong Development Bank (SPD Bank) plans to raise 30 billion yuan (4.4 billion U.S. dollars) by sales of shares and bonds to improve its capital adequacy, the bank said in a statement on Friday.

The medium-sized lender, partly owned by Citigroup Inc, will sell 15 billion yuan of yuan-denominated shares in a private placement with institutional investors and 15 billion yuan of subordinated debt.

The funds will be used to bolster the bank’s core capital and boost its capital adequacy ratio, which stood at 9.06 percent at the end of 2008.

The fund-raising plans are pending shareholder approval and the new shares will be priced at no less than 90 percent of the average price over the last 20 trading days, according to Saturday’s China Daily.

The bank’s 2008 net profit more than doubled from a year earlier to 12.5 billion yuan on rapid loan expansion. Its bad loan ratio dipped 0.25 percentage points to 1.21 percent at the end of last year.

The lender targets a 10 percent profit increase and loan growth of 28 percent in 2009.

(Xinhua News Agency April 11, 2009)

Ping An Insurance (Group) Co will focus on its China business after its ill-fated investment in Fortis, senior executives said Thursday.

The Shenzhen-based insurer is smarting from its thwarted attempts to expand overseas as it has made a 22.79-billion-yuan (US$3.34 billion) impairment charge on the Fortis investment, which pushed the insurer to post two straight quarterly losses in the second half of last year.

Ping An President Louis Cheung said yesterday in Hong Kong that the insurer will focus on its China business rather than expanding overseas, after its ill-timed investment in Fortis amid the worst financial crisis since the Great Depression. He added the worst time for the insurer is over.

“Going forward, we remain very optimistic about maintaining our growth momentum, and we should be seeing better investment results in the future as the markets begin to stabilize,” Cheung said.

Chairman Peter Ma said in Shanghai yesterday that the global financial crisis was to blame for the failed investment as the Chinese insurer “hasn’t expected a global and systemic financial crisis” after making enough due diligence on Fortis in a region where markets were traditionally seen as stable.

Ping An, the world’s second-biggest insurer by market value, initially bought into Fortis in October 2007, paying 23.87 billion yuan in a deal meant to pave the way for an acquisition of Fortis’ asset management unit. It paid an average price of 19 euros (US$25) per Fortis share then. Fortis traded at about 1.50 euros recently in Europe.

Timothy Chan, the insurer’s deputy chief investment officer, said the company’s stock investments could reach up to 12 percent of its overall portfolio this year.

(Shanghai Daily April 10, 2009)

After nearly a decade in gestation, the Chinese second board, or the Growth Enterprises Board, has got regulatory approval.

Although the securities regulator has yet to disclose a timetable for its launch, it issued a road map last week laying down, for the first time, the rules and procedures that will help in the unveiling of the NASDAQ-style board.

The idea of a NASDAQ-like market on the mainland was first mooted in the mid-1990s. After a few false starts, it was put on the back burner and nearly forgotten until 2007, when the stock markets boomed. The buoyancy led to increased demand, by many private sector entrepreneurs, for an appropriate channel to raise funds directly from the investment public.

Indeed, quite a few private sector enterprises, especially those in the technology sector, had successfully obtained listings on the NASDAQ or the growth enterprise market in Hong Kong.

Despite fervent discussions over setting up such a market on the mainland, the regulator was widely perceived as taking a decidedly slow approach to its formation, until now.

GEB came back into the reckoning in August 2007 when the country’s State Council approved a plan to develop a multi-level capital market system.

In March 2008, Shang Fulin, chairman of the China Securities Regulatory Commission, said the regulator would “try to roll out the GEB in the first half” of that year. A few days later, on March 22, the CSRC released draft regulations for the GEB and began to solicit public feedback. But the early days of the US mortgage crisis forced the regulator to take a cautious approach.

This year, as China’s proactive monetary and fiscal policies started to yield results, things looked different for the establishment of a second board. Since the beginning of the year, the country’s benchmark Shanghai Composite Index has rallied by over 30 percent despite occasional hiccups, catapulting the Chinese stock market to second place after Peru among the best performing stock markets in the world.

To be sure, the country’s capital market is more mature than what it was 10 years ago, and investors and VC firms are keen to invest in the country now than before. Coupled with the recovery of the stock market, the GEB launch roadmap comes at a time when meeting the funding needs of many cash-strapped private sector enterprises has become an integral part of the government’s stimulus efforts.

According to China Association of Small and Medium Enterprises, SMEs account for 99.8 percent of the country’s companies, and contribute about 60 percent to the GDP and offer 75 percent of all manufacturing jobs. However, only 2 percent of the capital raised by SMEs comes from direct financing. Most of it is from banking loans and other lenders.

(China Daily April 10, 2009)

The consumption confidence of Chinese bankcard holders warmed up in the first quarter of this year and is expected to rebound further in the second quarter, according to statistics revealed yesterday by China UnionPay and Xinhua.

China UnionPay and Xinhua have recently launched an index, called BCCI, to track changes in the consumption behavior of Chinese bankcard holders. The index bounced back to 86.95 in the first quarter of this year from 86.88 in the last quarter of 2008.

The most depressed sentiment of Chinese bankcard holders was in the first quarter of last year, when the index fell to 83.62.

“The year-on-year and quarter-on-quarter increase of BCCI indicates that the global financial crisis is not impacting Chinese consumers in a big way,” said Xu Luode, president, China UnionPay, the country’s bankcard network operator. “We expect the index to increase further in the second quarter.”

Lu Xiaoming, chief economy analyst of Xinhua News Agency, said consumption has been relatively stable compared with exports and investment, indicating that the stimulus packages have boosted consumer confidence.

According to the National Bureau of Statistics, retail sales nationwide totaled 2 trillion yuan in the first two months of this year, an increase of 15.2 percent on a yearly basis.

In addition to the government’s 4 trillion yuan stimulus package, other measures like education and healthcare reforms and lifting residents’ income would also help stimulate rural consumption.

Meanwhile, most global financial institutions and industry experts are optimistic about the country’s economy this year.

The World Bank said on Tuesday that fueled largely by the huge economic stimulus package, a recovery in China’s economy is likely to begin this year and take full hold in 2010.

Sun Mingchun, economist, Nomura International, said China’s economy will see a V-shaped recovery this year, with the GDP growing as much as 10 percent in the first quarter of next year.

(China Daily April 10, 2009)