May 04, 2011 07:04 PM

Closer Look: 100 Trillion Yuan in Banking Assets

As of 2010, the total assets of China's banking industry have grown to 2.39 times the amount of national GDP, breaking records once again at nearly 100 trillion yuan.

In comparison, according to OECD data, Japan's banking assets in 2008 stood at US$ 9.81 trillion, 2.27 times the amount of its GDP, which was US$ 4.32 trillion. Germany, another country representative of economies that rely on banks for financing, had 6.6 trillion euros for banking assets and 2.48 trillion euros for GDP in 2008. Its 2008 banking-assets versus GDP ratio was 2.66, almost the same as it had been in previous years.

The surge in China's banking assets, which took off in 2009, was attributed to political directives rather than monetary policies. In 2009, huge amounts of loans were made at the order of government. The central bank did not cut interest rates; in fact, it conducted a net absorption of liquidity from the market through its open market operations. Meanwhile, the market capitalization of domestic stock exchanges more than doubled from a year earlier, an indication of too much capital flowing around.

Since then, the entire banking industry has become mired in a battle to rein in the huge credit it had unleashed. Efforts fell flat to bring annual new lending rates down to post-surge levels of about 5 trillion. Credit expansion for 2010 reached 7 trillion. With such expansionary projections, the markets still shivered at rising interest rates in early 2011.

Some claim that the credit pinch under a 7 to 8 trillion yuan credit expansion scheme is mainly the result of previous investments taking up too much follow-up capital that could otherwise be invested in new projects.

One way to cut the ballooning growth in bank assets, and to reduce the reliance on credit expansion would be to develop the bond market. Many commercial banks have woken up to the potential of bonds as a substitute for credit financing. Currently, only CITIC Securities Co. Ltd. and China International Capital Corp. are allowed to issue medium-term notes.

Diversification of capital from credit to corporate bonds will help break the pattern of fixed spreads, and thus reduce the reliance on bank credit. Once a proper mechanism for the bond market is put in place, it will attract fund companies that have more sensitive investment capital. The primary task for regulatory authorities that wish to see a reduction in banks' total assets would be to build a balanced, well-regulated bond market that can break the monopoly of banks on financing channels.

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