BEIJING: Surging bank lending could threaten the stability of financial institutions in fast-growing China, the OECD said yesterday in a report that urged more market reforms to help reduce such risks.
STABILITY THREATENED: A woman walking past a god of fortune figurine displayed for the coming Lunar New Year celebrations in Beijing. Rampant bank lending could threaten the stability of Chinese financial institutions, the OECD said in its annual report that urged more market reforms to help reduce such risks.— AFP photo
The Organisation for Economic Cooperation and Development (OECD) said in its first China survey for five years that while Beijing’s policies had helped shield the country from the world slowdown, excess government controls were a problem.
It recommended China loosen its grip on the value of the yuan and further accelerate other market-based economic reforms, including allowing greater foreign access to its financial markets.
The report identified the recent surge in new lending as a key problem facing the nation’s economy and financial system.
“While Chinese banks have so far weathered the global slowdown well, the acceleration in new lending since early 2009 raises the risk of a renewed surge in non-performing loans (NPLs) in the years ahead,” the report said.
The lending binge has emerged as a key concern for China’s economic policymakers, with Liu Mingkang, chairman of the China Banking Regulatory Commission, saying last month the government would rein in credit.
His comments come after the central bank moved to hike the minimum amount of money that banks must keep in reserve and took other steps analysts said were meant to curb lending amid fears of bad loans, asset bubbles and overheating.
Chinese state media also has reported major banks were verbally ordered by authorities to cut new lending, although Liu denied such a move.
Some analysts have said they expect Beijing to go even further by raising interest rates, but most have said such a move is unlikely before mid-2010, as it could fuel inflation.
The OECD said recent “sharp increases in land prices” stemmed partly from excess liquidity and it warned financial institutions could be stuck with bad loans if property prices fell.
Property prices in Chinese cities have soared, rising in December at the fastest pace in 17 months, according to official figures.
The surge accelerated after Beijing responded last year to the world economic woes with tax breaks, easy bank loans, lower down payment requirements and by calling on banks to pump up lending to keep the economy growing.
As a result, new loans nearly doubled in 2009 from the previous year to 9.59 trillion yuan (US$1.4 trillion), according to government data.
The Paris-based OECD called bad loans “perhaps the most significant near-term risk” to Chinese financial institutions.
It advised lifting ceilings on foreign investment in banks to “put pressure on these institutions to upgrade their governance, management and technical capabilities, and would facilitate their international expansion.”
It also advised China’s leaders to move more quickly toward freeing up the yuan. — AFP