Amidst economic slowdown, China’s biggest banks are maintaining lower loan cost despite the government urge to increase them. According to the bank’s top officials, this resistance is one of their strategies in order to maintain their lending operations profitability.
However, despite the resistance in increasing loan cost, the officials explained that the banks operate on a 10 percent benchmark lending rate for the loan discounts. The Chinese government have finally approved the benchmark. They added that higher interest rate may stun efforts of encouraging clients to acquire mortgages. Mortgages and loans have lowered for six-straight quarters in China.
Putting clients on a lending benchmark will minimize reckless loans made from the past, the officials explained. China’s government approval on the 10 percent benchmark adds more flexibility for the banks to complete funding despite the lower deposits. The deposit cringe has minimized investors from investing due to the bank’s lending margins for the last three quarters, officials added. An analyst for Citigroup, Inc explained that Hong Kong-listed Chinese banks profit growth weighted average have slowed from 21 percent in the first half to 6.4 percent in the third quarter.
People’s Bank of China, the Agricultural Bank of China Ltd and the China Construction Bank Corp. are studying strategies to avoid credit boom and deposit cringe to improve profit growth weighted average. The banks’ profit setback was due to the financial crisis that happened during last quarter of 2008. Spending binge of fueled inflation and the slow pace of gross domestic product resulted to growth in loans in 2008. These were the reasons why the banks fought to implement a 10 percent benchmark for loans.
Credit as Funding for Government Projects
Meanwhile, China’s planning agency and local government are eying on credit to fund possible projects. A 700 billion yuan of road and subway constructions by the end of August are set to be implemented by the National Development & Reform Commission. An overall estimated budget of 275 billion yuan from the government will be allotted for these projects. Government now need to opt for bank loans to fund the rest of the project cost. They are also planning to put up a 157 billion dollars project in 2013.
Loan Quota Announcements
On the other hand, China has yet to announce lending quotas for 2012. A 7.5 trillion yuan to 8 trillion yuan is forecast. Furthermore, a 623.2 billion yuan allotted for new loans are set according the China Central Bank.