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03328 BANKCOMM
RTNominal down3.810 -0.060 (-1.550%)
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15/09/2020 11:20

China's US$420bn small-loan push puts policy before profit

[ET Net News Agency, 15 September 2020] The Chinese government has drafted banks into
an aggressive plan to revive the economy. Planners have directed the country's "big five"
banks to increase lending to micro and small enterprises (MSEs) by 40% this year.
S&P Global Ratings estimated the banking system will extend RMB2.9 trillion (US$420
billion) in new MSE loans in 2020, about 17% of new lending in the year. These are
breathtaking numbers, and S&P expects the MSE program will strain the profitability of
Chinese banks.
This is according to a report published today by S&P, titled, "China's $420 Billion
Small-Loan Push Puts Policy Before Profit."
"We view MSE lending as policy-led with the larger, state-controlled banks doing most of
the work," said S&P's credit analyst Robert Xu.
The National People's Congress (NPC) in late May set a goal of creating 9 million new
jobs in China in 2020, targeting an unemployment rate of 6%. MSEs contribute a much higher
portion of economic growth compared with the credit they receive from the country's
banking system. Beijing is addressing this imbalance with a series of reforms.
Authorities want China's big five banks, namely Industrial and Commercial Bank of China
Ltd. (01398), China Construction Bank Corp. (00939), Agricultural Bank of China Ltd.
(01288), Bank of China Ltd. (03988), and Bank of Communications Co. Ltd. (03328) to
increase their MSE lending 40% this year. The moves are aimed at alleviating MSEs' funding
and liquidity strains, and at stabilizing the unemployment rate.
"We believe such vigorous MSE support will remain at least as long as COVID-19 or other
natural disasters weigh on China's economy and employment," said Xu.
MSE lending has thin margins. These could easily turn negative if low-cost funding
evaporated, or loans soured at a faster rate than lenders expected.
The agency estimated the sector return on risk-weighted assets for new MSE lending to be
about 44 basis points (bps). With lending rates on the decline, banks will find it
increasingly difficult to stay profitable.
"Measures such as cuts to the reserve requirement ratio make such lending profitable for
now, but the economics of the transactions are finely balanced," Xu added.
Using simple loan growth targets to solve an MSE funding shortage may not be sustainable
and could create systemic risk, S&P noted. Globally, MSEs are usually regarded as high
risk, given their small size and a greater chance of failure, and their lack of
high-quality collateral.
There are also risks specific to Chinese MSEs. These include a basic economic system
that favors large, state-owned firms, industrial development that is skewed toward
infrastructure (raising rent and staff costs for small firms), a lack of direct financing
channels, and entrepreneurs' short-term tendencies.
"Looser lending terms may help some viable MSEs stay afloat. However, such practices may
also prop up defunct entities with little prospect of viability, inviting moral hazard
along the way. As seen in many spheres, China is making tradeoffs to support the economy
in COVID's aftermath," said S&P's credit analyst Harry Hu.
This particular set of trade-offs may come at the expense of banks' profits. (KL)

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