August 21, 2009 / 12:45 PM / in 10 years

BASIS POINT-Chinese banks slow pace of lending -sources

HONG KONG, Aug 21 (Reuters Basis Point) - Bank of China (3988.HK) (601988.SS) has sent an internal document to its branches advising them to scale back lending for the rest of the year, becoming the latest major domestic bank to put a brake on lending, two sources at the bank said on Friday.

Concern that a possible tightening of bank lending could slow the economy had pushed China stock markets down earlier this week while the yen surged to a one-month high against the dollar on Friday, with traders citing worries about the potential for further weakness in Chinese shares.

Other sources at several Chinese banks also said new lending has slowed in recent months, confirming previous suggestions that they would act to avoid problems caused by easy credit, such as asset bubbles and non-performing loans.

In late July Chinese financial magazine Caijing reported that both Industrial & Commercial Bank of China (1398.HK) (601398.SS) and China Construction Bank (0939.HK) (601939.SS) have put a ceiling on new lending for the year.

The bi-monthly Caijing reported that with the new ceilings in place, ICBC has already lent 83 percent of its full-year new lending total, while CCB has lent 79 percent.

ICBC is aiming to grant full-year new loans of 1 trillion yuan, while CCB has set a goal for new loans of 900 billion, according to Caijing. The two banks issued new loans of 825.5 billion and 709 billion in the first half, respectively.

SLOWING THE FLOW

As China’s big banks slowly close the tap on new loans, bankers report longer waits for internal credit approvals, and increasing pressure on pricing due to limited liquidity.

“It takes more time to process credit approval from Beijing headquarters now, and the pricing for onshore deals has been heading north in recent months, particularly for U.S. dollar deals,” said a banker from one of the big four banks.

The same banker said that while Chinese banks could lend at a margin of 150 basis points over Libor for top-tier multi-national companies in the first half, that price had now spiked to over 200 basis points.

FREE LENDING ENDING?

Some bankers in Chinese domestic banks have encouraged clients to draw down previously granted facilities as soon as possible due to concerns about a possible policy reversal.

Since late 2008 the Chinese government has urged banks to lend freely to support its economic stimulus package, introduced to prop up growth in the world’s third-largest economy.

Heeding Beijing’s call, Chinese banks granted a record 7.73 trillion yuan in new local currency loans in the first seven months of 2009 alone, far exceeding the government’s minimum target of 5 trillion set at the beginning of the year.

However, concern over asset bubbles and non-performing loans (NPLs) recently sparked market speculation that Beijing might alter course later in the year, prompting senior Chinese officials to state on Aug. 7 that Beijing remained committed to loose, pro-growth policies.

But the same officials noted they expect lending to slacken over the course of the rest of the year.

Sources said earlier this month that China’s banking regulator, concerned that record lending could lead to a spike in bad loans, may tighten banks’ capital rules by excluding the subordinated bonds they sell to other banks from their capital base. [ID:nSHA168045]

Some financial regulators estimate that as much as one-fifth of banks’ new loans have flowed to China’s surging stock and property markets this year, creating asset-price bubbles. (Reporting by Prudence Ho; writing by Stephen Aldred; editing by Chris Pizzey)

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