naked capitalism

In another sign that China’s slump is serious enough to evoke crisis responses from the officialdom, banking officials there announced that they were relaxing rules on bank bad debt ratios. The objective is to encourage banks to continue to extend credit to borrowers experiencing short-term difficulties who have viable businesses. The concern, of course, is that banks will have trouble determining who will pull through, and could easily wind up with a lot of dud loans.

From Bloomberg:

The China Banking Regulatory Commission will drop its target of reducing the balance and ratio of bad loans after five years of declines, and instead aim to prevent a “massive and rapid rebound” in soured debts, Chairman Liu Mingkang said in Beijing today….

Looser requirements may fuel concerns about a surge in bad loans, four years after China finished a cleanup of its banking system that cost more than $500 billion. Lenders will likely face weakening asset quality, rising defaults and “significant” constraints on profits in 2009, Standard & Poor’s said Jan. 7.

“What we’re concerned about is whether banks will, under government interference, boost lending without properly recognizing the risks,” said Liao Qiang, the rating company’s Beijing-based analyst, in an interview. “Governments tend to relax prudential regulatory requirements in difficult times. The key is how banks” react.

Measures to boost credit include allowing banks to lend to businesses afflicted by “temporary” financial woes due to the global recession but with sound fundamentals, Liu said. Lenders can also “restructure” loans and “scientifically” adjust the types and maturities of debt, and the regulator will support the sale and securitization of loans, he said without elaborating….

The regulator will have “reasonable tolerance” for rising bad loans, Liu said. Shrinking corporate profits and interference by local governments have “seriously” reduced borrowers’ willingness to repay debts, he added. Banks cut their average bad-loan ratio to 5.49 percent at the end of September, from 6.3 percent six months earlier.

Still, the CBRC will “strictly” ban companies from taking up new project loans to repay existing ones, and prohibit bundling of non-performing assets into securities, according to the transcript. Banks aren’t allowed lend to production projects before the investors get relevant approvals, Liu said.