Are Chinese banks put to risk as government calls to rev up POE lending?

The bad loan ratio of select sectors hit 4.7% compared to the 1.7% industry average.

The tethering asset quality of Chinese banks is put to greater risk amidst heightened calls by the government to lend more to privately owned enterprises (POEs) which have higher loan delinquencies.

The China Banking and Insurance Regulatory Commission (CBIRC) aims to have new loans to POEs account for over a third of total new corporate loans for large commercial banks and more than two-thirds for medium-sized and commercial banks.

A large number of POEs and micro and small enterprises (MSEs) are focused on cyclical sectors like manufacturing, real estate, wholesale and retail which makes them more vulnerable to China’s economic slowdown and escalating trade frictions. The sector’s non-performing loan (NPL) ratio stood at 4.2% and 4.7% in end-2017 which is significantly higher than the 1.7% for all commercial bank loans.

Also read: Chinese banks struggle to strike balance between curbing risk and lending

“POEs have had much higher default risks because of the government support available to SOEs [state-owned enterprises] and the banking sector is more comfortable in continuing to refinance SOEs' maturing debts,” Moody’s Investors Service said in a report.

The bad loan ratio of Chinese commercial banks already hit a 10-year high of 1.89% by end-2018, government data show.

However, Moody's notes that Chinese commercial banks remain in a strong position to mitigate the potential rise in asset risk associated with the intensified lending as their loan underwriting standards have improved since 2013 with the implementation of the Basel Committee on Banking Supervision's global bank capital regulations.

“[W]e expect commercial banks to carry out responsible underwriting standards whilst acting on the banking regulator's call to expand credit to POEs,” said Moody’s.