Let Banks Practise Real Business Decision

By EO Editorial Board
Published: 2009-05-26

Original article: [Chinese]

China's National Audit Office (NAO) has finally confirmed earlier media reports that some bank loans failed to enter the real economy, instead, the monies turned into speculative bill financing.

The NAO didn't disclose which were the banks involved in such activities, and the authorities were unlikely to fully learn of the exact scale of "inflated" credit. But we can assume that these are not isolated cases.

The NAO attributed the cause to lax control over credit assessment and approval procedures at banks -- this is a fact, but it may not be the essence of the problem.

We believe the latest findings reflect the reality of China's banking industry reform. On one hands, the Chinese banks, as listed companies, have to mitigate risks and ensure investment returns to safeguard shareholders' interests; on the other hand, the banks are restrained by non-market factors, such as to meet the demand of regulators to support credit expansion target.  

We are more inclined to believe that such inflated loans were a product of the above-mentioned dual pressures.

Some banks may well aware of the true colors of infated loans and bill financing, however, they lack the drive to tighten credit evaluation and approval procedures. 

At present, except for the Agricultural Bank of China, the other major Chinese state-owned banks are already listed and become some of the most valuable banks in the world.

As commercial banks, they ought to balance risks and returns, keeping at heart the shareholders' interests and maximizing profits.

Since the fourth quarter of 2008, a series of massive government-driven projects have kicked start under the 4-trillion yuan stimulus package. The banks favor these projects, partly due to commercial interest, but partly also in response to the Chinese characteristic market economy.

The pace of credit expansion, to a certain extend, is tied to meeting the country's 8% GDP growth target. When the banks compete with each other to provide loans, it is no longer purely a business decision, but political consideration too sets in.

In other words, the dual pressures have fueled banks' enthusiasm in providing credit, and become the driving forces for inflated loans.
And that could lead to systemtic risks, for instance, we have no idea how much funds have been funneled into the stock markets, and if these speculative funds could cause instability in the stock markets.

The NAO proposed regulators to further strengthen supervision and check against the real purpose of bill financing. This is a sound advice.

However, we believe the core of the issue should also be addressed, that is -- administrative intervention against banks' business decision ought to be stopped. 

It is easy to criticize banks for foresaking enterprises badly in need of funding; but to moralize the issue or to exert administrative pressure to deliver results would only make things worse, as it could lead to future risks in the financial system.

The predicament, however, is unfortunately hard to avoid, given that China's financial system is not fully market-oriented. 

When it comes to loan issuance for the small and medium sized firms, the banks become more prudent and would only do so if there are profits to be made. Such mentality is reasonable.

If the banks were to recklessly release loans in the name of propping growth, we ought to be on guard.

We believe the funding difficulties faced by small and medium sized firms, to a certain extend, are consequences of slowness in liberalizing the financial sector and promoting private lending.

In view of thta, what the government could do to help is to further liberalize the market and repeal unreasonable administrative controls.

Translated by Liu Peng