Tags: china | banks

China Bank Lending Spree Creates Risks

By Dan Weil   |   Monday, 01 Jun 2009 09:45 AM

Chinese bank lending has exploded higher, playing a key role in keeping the world’s third largest economy afloat.

But some of the loans may go bust, erasing progress China’s banks have made in cleaning up their operations over the past 10 years, The Wall Street Journal reports.

The banks have turned themselves from corrupt state-dependent enterprises into some of the foremost financial institutions in the world.

But, now they are ramping up lending to help finance China’s $587 billion fiscal stimulus program.

In 2009 through April, China's banks provided 5.17 trillion yuan ($757.15 billion) in new loans, exceeding the total for all of 2008.

Already the loan binge has trimmed bank earnings. Despite that fact that banks have 30 percent more interest-paying loans on their books than a year ago, most of them have seen profits drop.

"Everyone agrees that China's stimulus lending is damaging future bank balance sheets," Daniel Rosen, visiting fellow at the Peterson Institute for International Economics, tells The Journal.

To be sure, China’s banks are acting to limit the damage. China’s business magazine Caijing reports that some large banks already have given instructions to their branches to moderate loan growth, Reuters reports.

A source told the magazine that China’s central bank plans to meet with banks at the end of next month to discuss credit risk and the pace of lending for the rest of the year.

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