After the December 2008 stimulus package, the structure of Chinese bank lending has changed significantly, shifting greatly towards governmental lending. For Chinese banks, which classify government loans among their corporate loans, corporate lending in China increased 20.8% YoY in 2009. 

Given the total growth rate of Chinese bank lending in 2009 of 33.07%, which is 22.70% beyond the average loan growth of the previous 5 years of 10.35% (except 2008, where lending dropped due to high interest rates and government tightening of liquidity), we believe that the majority of the new lending by Chinese banks is to governments, or approximately $313 billion. Banks are the main source of funding for corporate and government borrowers in China, due to the fact that capital markets are underdeveloped in China, and in 2009 only two provinces or municipalities announced bond issuances, totalling $1.71 billion.

Due to a disparity in economic development within China, some provinces are well-developed and others are still areas of low economic activity. A great deal of the government spending is believed to be in infrastructure, and while infrastructure projects in developed areas are expected to be self-sustaining, those in regions with low economic activity are initiated for development purposes and will not create immediate cash flow. Where these have been funded by banks, we expect to see a high percentage of NPLs.

Although the NPL level of Chinese banks has been dropping steadily over at least the past four years, well into the global economic downturn, we believe that the level of legacy NPLs has been diluted tremendously by massive amounts of fresh loans. However, with expected NPLs arising from government loans to infrastructure projects, in relatively undeveloped areas, to crop up in the near future, we believe that a rise in total NPLs levels is to be expected soon.   Source: China Daily

BIIA Newsletter September II – 2010 Issue