Driven by the Chinese government's stimulus programmes for the revival of its crisis-hit economy, the nation's banks are pumping trillions of yuans to bolster economic growth which could lead to huge material losses in the future, a report by the Fitch rating agency said.
China registered a record lending of 5.2 trillion yuan ($762 billion) in the first four months of the current year to fund various stimulus projects initiated by the government, which has already crossed the minimum target set for the whole year. Loans disbursed by the Chinese banks in 2008 were 4.9 trillion yuan ($712 billion).
The Fitch report on China's banks released yesterday said it's seeing early warning signals from the Chinese banking system.
Chinese banks' high profit targets, at a time when the interest rates are declining, are driving up the lending volumes to unprecedented levels, thereby deteriorating the asset quality.
"This emphasis on short-term profit may be contributing to excessive risk-taking by banks, particularly in corporate lending, which could lead to material losses in these portfolios," Fitch said.
The Chinese government announced a huge stimulus package of 4 trillion yuan ($586 billion) last year to tide over the financial meltdown.
Fitch said future losses on stimulus lending could turn out to be larger than expected, and it is unclear what share the central and/or local governments ultimately will be willing or able to bear, and more importantly, what share will fall on banks.
More than 90 per cent of the loans have gone to the corporate sector, which is about three times the amount given during the same period last year, while the country's public sector companies registered a slump of 32 per cent in their profits due to continuing weakness in global economy.
Exports dived 22.6 per cent in April compared to last year and the GDP growth for the first three months of the year, was at a ten-year low of 6.1 per cent.
The medium-term risks of Chinese banks are growing as plunging corporate profits could lead to payment defaults resulting in bad loans for the banks with huge loan exposures, adversely affecting their balance sheets.
Fitch analyst Charlene Chu said, ''At the heart of these concerns is the recent steep rise in corporate exposure amid concurrent decline in enterprise profits.''
''This means that each yuan invested or lent is unlikely to generate the same return as before, which over time will take its toll on corporate borrowers' ability to repay and lead to credit losses for banks,'' she added.
The Fitch report came at a time when there are concerns about whether China has embarked on a path to recovery from the present economic crisis in spite of some recent signs of improvement.
The head of China Banking Regulatory Commission, Liu Mingkang said last week that banks face significant pressure on profits this year due to the credit explosion and increased risk of bad loans.
Fitch is wary about Chinese banks' reclassifying of more special mention loans-unsound credits with possibility of default-as bad debts (non-performing loans). Non-performing loans of foreign banks are on the rise during the past two quarters.
Moreover, Chinese banks are provisioning more against unimpaired loans indicating that they themselves anticipate higher losses.
However, in the present scenario, Fitch believes that the reserves kept aside by banks seem inadequate.
There are also concerns about where exactly are the loans going. Earlier this week, government introduced rules to ensure money is going to the real economy rather than to other areas such as asset markets.
Infrastructure projects which were stalled due to credit crunch have been revived on the hope that the government would bail out borrowers who get into trouble, the report said.
Nevertheless, the report admitted that the proportion of aggregate non-performing loans and special mention loans to the total loans fell last year, while industry-wide loan loss reserves continued to strengthen.
Analysts believe that China is sticking to a ''moderately loose'' monetary policy to increase liquidity in the financial system, whereas its western counterparts and Japan are struggling to get rid of tainted assets and making efforts to unfreeze credit.