Foreign banks in city dodge bad loan bullet
- Source: Global Times
- [08:28 August 03 2010]
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A man passes by billboards promoting foreign banks in Lujiazui in Pudong New Area. Photo: IC
By Zhou Mi
Tight investment restrictions for foreign banks in Shanghai mean they are not exposed to the growing risk their Chinese counterparts have taken on by lending heavily to local government over the past year.
Few foreign banks in Shanghai are involved in lending to the local government as they tend to be very cautious with regards to the sector, Yan Qingmin, head of the Shanghai Branch of the China Banking Regulatory Commission, said on July 30.
However, Li Mingliang, an analyst from Haitong Securities, told the Global Times Monday that the main reason foreign banks in the city have been cushioned from the growing pile of bad loans is the tight restrictions on them making investments in local government projects, which are a main source of the problem.
"Foreign banks would probably have been very interested in such investments if it were easier for them to get involved." Li said.
Of the 32 billion yuan ($4.7 billion) of bank loans in Shanghai rated by the Shanghai Branch of China Banking Regulatory Commission as being high risk in the first half of this year, 3 billion yuan ($443 million) came from foreign banks, the commission announced on July 30.
In addition, the proportion of non-performing loans by foreign banks registered in Shanghai dropped by 0.13 percentage points to 0.74 percent of their total amount of loans over the same period year-on-year, while their total assets increased by 26 percent to reach 1.09 trillion yuan ($148 billion).
Many of the bank loans in China that are classed as being at high risk of default by the China Banking Regulatory Commission have been made to local governments, spurred on by the 4 trillion yuan ($590 billion) stimulus plan issued by the central government in November 2008 as a response to the global economic downturn.
The plan encouraged local governments to increase infrastructure projects to stimulate employment and the whole economy.
However, the commission said last month that China's banks face a serious default risk on up to 23 percent of the 7.66 trillion yuan ($1.13 trillion) they have so far lent to local governments through government-backed financing companies.
Local government-backed financing companies emerged as intermediaries between banks and governments from 2009, when the People's Bank of China and China Banking Regulatory Commission issued guidance promoting the use of these investment vehicles at the local authority level.
"Things went sour as there is no efficient monitoring of those government-backed financing companies and the projects they invest money into," Li said. "Should the worst happen, the central government will cover any defaults, meaning the tax payer will ultimately foot the bill."
