MNI Insight: China Banks Pressured To Boost Loans And Derisk

--Debt-to-Equity Swaps Could Be Used As A Tool To Reduce Debt

--New Asset Management Rules To Land Significant Blow To Bank Profits

     BEIJING (MNI) - China's banks are caught between competing official

priorities, with policymakers insisting they rein in risky loans while also

encouraging fresh lending to the private sector as trade tensions threaten

growth, MNI understands from high-ranking officials and bankers.

     "China's banking sector is likely to see a renewed rise in non-performing

assets exposure, especially given that large-scale monetary stimulus is not

feasible at this time, and strict regulation is set to be the new normal in

future," Yu Xuejun, chairman of the supervisory board for key state-owned

financial institutions at the China Banking and Insurance Regulatory Commission,

told bankers at a forum in Beijing.

     The regulator blamed lenders for having "provided enormous credit" and

"created channels bypassing regulations," stoking asset bubbles and pushing up

leverage since the 2008 global financial crisis.

     --SME SUPPORT

     But at the same time, deceleration in economic growth, as consumption and

investment weaken, has prompted policymakers to push for increased private

sector credit, particularly for small and medium-sized enterprises (SMEs), which

account for around 60% of GDP growth and 80% of urban employment.

     Banking regulators have reportedly ordered big banks to cut lending rates

for SMEs as much as possible, and some have fallen to 4.77% -- significantly

lower than the 5.97% weighted average for non-financial sector loans. Rates,

though, have not fallen as far as officials would like.

     Zhang Gengsheng, vice-president of China Construction Bank, said SME

lending rates are higher than those to bigger companies, which often better

rated as credits, but stressed that they are following the authorities'

guidance.

     "The willingness of big banks to support SMEs should be protected and

[policymakers] should not force them to further lower rates, or they will get

the opposite result," Zhang said.

     He suggested other measures to incentivise SME lending, including more

targeted cuts in reserve requirement ratios.

     --DEBT-TO-EQUITY SWAPS

     Banks' non-performing loan ratio rose to 1.84% at end-Q2, from 1.74% at

end-Q1 -- the highest since 2009, China Banking and Insurance Regulatory

Commission data shows.

     Banks are being encouraged to conduct debt-to-equity swaps to bail out

highly indebted companies, particularly those that are state-owned. But progress

has been slow. According to the National Development and Reform Commission,

CNY1.73 trillion worth of swap agreements had been signed as of end-July, but

only 352 billion yuan transacted.

     Zhang Jianhua, president of Huaxia Bank, said companies could use swaps as

a tool to renege on debt obligations, particularly as local governments could

pressure banks to sacrifice their own interests to rescue SOEs.

     "Although banks could surrender some profits, it must be a market-oriented

choice," he noted.

     --ASSET MANAGEMENT

     The PBOC also unveiled new asset management rules in April to rein in

shadow banking activity, clamp down on implicit guarantees and reduce leverage

rates.

     Although these rules were partly relaxed in June following market jitters,

lenders are nonetheless concerned about the impact on their profits.

     Luo Jinhui, vice-president of CITIC Bank Asset Management Center, said:

"Under the new rules, the scale of wealth management assets, particularly those

which are off-balance sheet, would shrink by over half by 2020, which means our

profits will see a large reduction."

--MNI Beijing Bureau; +86 (10) 8532 5998; email: marissa.wang@marketnews.com

--MNI London Bureau; +44 207-862-7489; email: ukeditorial@marketnews.com

--MNI London Bureau; +44208-865-3829; email: Jason.Webb@marketnews.com

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