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May 03

Chinese banks point to policy peril

Posted by nicklord in RBSINGCitiChinaCCB


China Construction Bank (CCB) has become the latest of the major Chinese banking groups to announce that it will raise substantial amounts of new capital to compensate for rapidly rising credit losses. These losses mainly stem from the lending boom that Chinese banks were commanded to undertake in 2008-2009. The lending policy was China's response to the global credit crisis.

In a filing with the Shanghai Stock Exchange last week, CCB announced that it was seeking to raise up to Rmb75 billion ($11 billion) through a rights issue of 0.7 rights for every 10 shares. With this issue, the total amount of new capital raised by Chinese banks this year reached $26 billion.

In 2009, China's banks extended double the amount of loans they did in 2008, some Rmb9.6 trillion. But those pigeons are now coming home to roost and many of those loans are turning bad.

China's Bank of Communications has publicly noted how difficult it is to steer a course through the policy lending goals of the government and its obligation to act in the interests of shareholders. Such sentiments will no doubt be shared by the big Western banks that now have government shareholders, such as Citi, RBS and ING.

Another parallel can be drawn to the period of 2007 when Western banks had to scrabble to raise fresh capital to offset the losses they had amassed in subprime mortgages (which was also a government policy). It took a full year before the enormity of the capital losses became fully known and in that time nearly all had to be bailed out, sold or bankrupted. Are China's banks heading for a similar fate?

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