What happens when you go on a stimulus-funded lending frenzy? Apparently, you do eventually run out of cash.
As Bloomberg reports on Tuesday:
Nov. 24 (Bloomberg) — China’s five largest banks submitted preliminary plans for raising capital to the industry regulator after they extended unprecedented amounts of new loans this year, according to four people with knowledge of the matter.
The China Banking Regulatory Commission evaluated the finances of Industrial & Commercial Bank of China Ltd., China Construction Bank Corp., Bank of China Ltd., Agricultural Bank of China and Bank of Communications Ltd. last week, the people said, declining to be identified.
Lenders were told to estimate potential capital shortfalls in 2010 based on their own lending forecasts and capital ratio targets for the year, and to make plans to plug the deficits, they said. The five banks extended a record 4.7 trillion yuan ($688 billion) of loans in the first nine months, even as lenders worldwide reined in credit to repair balance sheets. Bank of China said today it’s studying “various options” to replenish capital after doling out more new loans than any other Chinese lender.
The company’s shares fell in Hong Kong trading. “With China’s pace of credit growth, banks’ capital will be drained very quickly and that leaves little room for cushioning if asset quality worsens,” said Sheng Nan, a Shanghai-based analyst at UOB-Kayhian Investment Co. The CBRC said yesterday that lenders must formulate longer- term fundraising plans and those with “relatively low” capital adequacy ratios and without a “practical” plan will face four restrictions on their operations, including limits on market entry, outbound investment, new branches and “business expansion.”
Unsurprisingly, the Shanghai Composite reacted like this to the news:
Given Chinese banks had been lending ferociously to foreign businesses just as much as they had to domestic borrowers– filling the void left by western banks — any slowdown on loan origination due to a capital raising need should rightly scare investors.
Further, the above comes the day after S&P warned that under new Basel II regulations, some major banks might still be very much under capitalised too, among them Citi, UBS, Sumitomo Mitsui and Mitsubishi UFJ Bank.
Related links:
China: Too much of a good thing? – FT Alphaville
China’s fake recovery – FT Alphaville
Chinese liquidity – and stocks – go boom – FT Alphaville
China banks prepare to raise capital - FT