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FITCH EXPRESSES CONCERN ABOUT CHINA'S LOAN CASCADE
The ratings agency points to early warning signs that indicate asset quality is deteriorating

Daniel Inman

Finance Asia, May 22, 2009

This year, China's banks have opened the floodgates of credit: between January and the end of April, $757 billion worth of new loans were dished out, equivalent to 17% of the GDP in 2008. As such, China's banks are enjoying a rate of growth that their Western peers would kill for. The increase in lending is the government's doing, since it has given banks the task of financing the infrastructure spending that forms a large part of China's stimulus package.

Looking to the medium- to long-term, however, analysts are beginning to air concerns about what effect such a rapid increase in lending could have on the quality of the banks' loan portfolios.

A report released yesterday by Fitch Ratings highlights issues with the banking sector's $4.2 trillion corporate loan portfolio. The worry arises from the fact that China's banks are increasing their corporate exposure at a time when corporate profits are declining.

"Ordinarily, falling corporate earnings are met with tightened lending, but in China precisely the reverse is happening," said the report. This illustrates that "despite years of reform Chinese banks still retain an important policy function in upholding local enterprises".

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