Caixin
May 04, 2017 08:02 PM
FINANCE

Banking Regulator Warns of Overseas Lending Risks

(Beijing) — The head of China’s banking regulator warned in a recent closed-door meeting about the mounting risk in banks’ overseas loans.

Guo Shuqing, chairman of the China Banking Regulatory Commission (CBRC), emphasized during the internal government meeting on April 21 that the banking sector must safeguard against foreign-exchange risks, a meeting participant told Caixin.

Guo asked banks to cooperate with the People’s Bank of China, the country’s central bank, and with the State Administration of Foreign Exchange (SAFE), the foreign-exchange regulator, to minimize institutional risks.

Guo said that in recent years, banks have increased loans to developing economies with volatile exchange rates and uncertain economic futures. He said the risk of default is growing for some projects, the source told Caixin.

In 2016, three of China’s four largest banks saw growth in overseas loans exceed that for domestic loans. The Industrial and Commercial Bank of China (ICBC), China Construction Bank, and Bank of China each saw their overseas loans increase by more than 200 billion yuan, expanding 22%, 31% and 11% year-on-year respectively.

Some joint-stock commercial banks also experienced substantial increases in overseas lending. Overseas loans at China Merchant Bank increased 41.4 billion yuan ($6.0 billion), a rise of 72% year-on-year, while those at China Everbright Bank rose 19.8 billion yuan, an increase of 81%. Such loans at China Citic Bank grew by 30 billion yuan, a more-modest but still-significant 22% year-on-year increase.

Bank of China’s chief researcher, Zong Liang, said that total loans at the major banks are in the hundreds of billions or trillions of yuan. Although the growth rate for overseas loans appears sizeable, it is calculated from a much-smaller denominator. “Growth fluctuations are normal, especially with exchange rate volatility,” Zong said.

The central government’s “going global” strategy and slowing domestic growth are the main reasons behind the surge in overseas lending, said E Yongjian, chief financial analyst at Bank of Communications. He said that Chinese banks are servicing Chinese-invested firms to expand their businesses abroad, and that more recent initiatives such as the “Belt and Road” development strategy and excess production capacity have also pushed Chinese companies abroad.

As economic growth slows in China, and profits decline, Chinese banks are looking abroad for profitability, E said, adding that the tightening of banking supervision in some foreign countries has also provided Chinese banks the opportunity for expansion.

The banking watchdog unleashed a regulatory frenzy since Guo assumed his post in late February. Despite warnings of loan defaults, the ratio of nonperforming loans from overseas lending is generally lower than for domestic nonperforming loans. In 2016, bad debt from overseas lending for ICBC, China Construction Bank and Agricultural Bank of China was 0.6%, 0.37% and 0.93% respectively. This compares with 1.62%, 1.52% and 2.37% for total bad loans for the three.

Contact reporter Liu Xiao (liuxiao@caixin.com)

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