Business / View

Days of high profit growth are over

By ED ZHANG (China Daily) Updated: 2015-05-11 13:31

Here's why Chinese banks are reluctant to lend even though the central bank has cut both the interest rates and banks' reserve requirements: Their clients-mostly those on the corporate level-are besieged by more and more difficulties in the market and are less and less able to pay back their borrowings.

The latest data show that, since the beginning of the year, Chinese banks-led by the largest ones under State control-have seen the lowest profit growth rate in 12 years. There are already analysts forecasting that, based on the trend, the banks' growth could be even weaker in the second half of the year.

In the meantime, non-performing loans, those that may not be paid back in due time, are on the increase. ICBC, the bank with the largest domestic service network, reported a quarterly increment of 21 billion yuan ($3.43 billion) in NPLs, the largest since 2008.

Of course, the lower profit and higher NPL rate for banks are nothing strange, with plenty of other indicators already reflecting the economy's overall problems. No industry can report an average profit growth much higher than the growth in GDP. NPLs are on the rise, although still far from an alarming level.

But as the central channel to feed growth in all other industries and services, the state of the banking industry can cast a shadow on the whole economy, and it deserves great attention.

The worsening problem for banks could have two interpretations; one is that there is a problem and it is worsening, and the other is that they don't want to hide it off the balance sheet and want to make it a public concern, although not before making it the concern of the premier. Judging by the situation facing large State-controlled banks, both interpretations seem to apply.

China's slowing economic growth was seen as close to dangerous in the first quarter. The central government is trying to provide more impetus, but so far Beijing has been reluctant to write large checks for government-led investment in fixed assets, except for a few more highspeed railways and nuclear power stations.

Large banks like these kind of big ticket investment projects because they generate demand for large loans, and the loans have a de facto guarantee from the central government. Right now, the scale of national-level projects is still too limited to make the large banks happy, especially when compared with the government's massive stimulus program during the 2009-10 period.

Local governments, at the same time, are much less reliable partners for the banks to work with. From the once cash-rich cities in the Yangtze River Delta to less-developed cities in interior provinces, few can continue to back up their ambitions for urban infrastructure modernization with the revenue from land auctions.

Local housing developers cannot sell all the apartments they have built.

There is one more factor that the large banks hate: the new competition from Internet-based financial services, especially online lending, which is admittedly a poorly regulated and high-risk business. Despite all its problems, it can still attract many small investors and small companies simply because of its flexible terms.

The fact such a young financial industry can be attractive at all is enough of an indication that the high profit rate of the State banks in the past was not seen by its clients as a very welcome phenomenon, and that such a high profit rate is unsustainable. It cannot hold once there is competition.

So, just like any other industry, China's banking service will have to accept the so-called new normal. It will have to live with a lower, if not much lower, profit rate. It will have to face more competition, and it will have to learn from other State-owned corporations, to reinforce stronger internal discipline and cut operating costs.

But of course, they won't die. If the central government wants to save them, it will just have to release the building plan for one more public infrastructure project.

The author is editor-at-large of China Daily.

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