China’s banks storing up trouble with continued heavy lending for home purchases
China’s big banks are digging deeper into the housing market. First-half results from the country’s four largest lenders showed year-over-year increases in earnings of between 1.8 and 11.5 percent. They are also extending new credit more slowly than the wider financial system. That relative restraint is welcome, as are some signs of improvement on bad loans. But continued heavy lending into China’s residential property boom could be storing up fresh trouble. Official data shows China’s total social financing – a broad measure that includes non-traditional lending – rose 12.8 percent to nearly 167 trillion yuan ($25.3 trillion) in the 12 months to June. None of the so-called Big Four were that exuberant. The biggest, the $311 billion Industrial and Commercial Bank of China, expanded its loan book by about 9 percent, as did Bank of China. Agricultural Bank of China and China Construction Bank boosted their outstanding credit by 11 and 12 percent, respectively.
Meanwhile, some measures of stress improved a bit. The ratio of nonperforming loans to overall lending fell at three of the four banks. All but one also reported that the amount they have set aside in impairment charges had risen, as a proportion of the stock of duff loans. That measure had declined in recent years.
Nevertheless, the headline stability masks a shift in focus. All four banks, which traditionally focused on corporate borrowers, have rushed into mortgages. Home loans ballooned by between 21 and 28 percent over the last year, Breakingviews calculations show, and accounted for between 54 and 63 percent of overall lending growth. To be fair, the expansion is also slightly less frantic than at smaller rivals: China’s overall stock of personal mortgages rose by nearly 31 percent over the same period. Unlike many State-owned enterprises, the average Chinese family is not heavily indebted. Safeguards such as down payments provide some protection in the event of default. And while housing may be expensive, China’s leaders will do their utmost to avoid a slump.
Still, it’s another reason for shareholders to fret. China’s banks have long traded below book value, as investors worried they were underplaying their bad-debt problem. The mortgage mania adds another uncertainty.