Bloomberg News

Merchants Bank’s Ma Says China Is Safe From Wave of Defaults

September 14, 2011

(Updates with share performance in fifth paragraph.)

Sept. 15 (Bloomberg) -- Chinese regulators have taken steps to curb risks from the nation’s record lending boom and a repeat of the bad debts that led to a $650 billion bailout last decade is “impossible,” China Merchants Bank Co. said.

Non-performing assets will be “diluted” by China’s economic growth in the next eight to 10 years, President Ma Weihua said in an interview yesterday. Regulators also identified problems such as souring debt by local governments “relatively early” and sought to curb risks, said the president of China’s sixth biggest bank by market value.

A record credit boom that began in 2009 and more than $1.7 trillion of local government liabilities has fueled concerns that China’s banks will be saddled with bad loans. Regulators this year raised capital requirements and clamped down on off- balance sheet assets, prompting Merchants Bank to seek as much as 35 billion yuan ($5.5 billion) in a rights offer.

“It’s impossible to have a repeat of the large-scale non- performing assets” seen at Chinese banks before the government spent more than $650 billion in the past decade to bailout and list the nation’s biggest lenders, Ma said in the Chinese port city of Dalian while attending the World Economic Forum meetings.

Shares of Shenzhen-based Merchants Bank rose 1.7 percent to HK$15.24 as of 10:11 a.m. local time in Hong Kong. The stock has dropped 22 percent this year, compared with a 17 percent tumble in the benchmark Hang Seng Index.

Local Government Debt

China’s local governments, barred from borrowing debt directly, set up 6,576 financing vehicles by the end of 2010 to fund projects such as new roads and airports, according to a report from the National Audit Office on June 27. They had 10.7 trillion yuan in outstanding liabilities at the end of last year, of which 8.5 trillion yuan was from bank loans, it said.

Merchants Bank last month posted a 41 percent increase in first-half net income to 18.6 billion yuan. The lender said its bad-loan ratio narrowed to 0.61 percent as of June 30, from 0.67 percent a year ago.

Merchants Bank is bolstering capital as China joins U.S. and European regulators in tightening requirements to curb risks after governments were forced to bail out lenders following the global credit crisis. Local lenders are also raising funds to meet credit demand in China, where outstanding loans climbed 15 percent in August from a year earlier. Shareholders approved the lender’s planned rights offer to raise funds from China and Hong Kong last week.

Managing Loan Rates

Ma also said yesterday that Merchants Bank will strive to bolster its ability to price risk as the nation works to liberalize its system for setting interest rates. The central bank currently sets a ceiling for the interest rate paid on bank deposits and a floor on the rate for bank lending.

Central Bank Governor Zhou Xiaochuan said at the end of 2010 that China would make “noticeable progress” in the next five years on interest-rate liberalization.

“A good bank should seek a balance of risk and return,” Ma said. “We think that the bank will be unable to build its ability for risk pricing if it always focuses on enterprises with low risk and runs low-risk businesses.”

--Stephen Engle, with assistance from Christine Hah, Dieter Depypere and Penny Peng in Beijing. Editors: John Liu, Chitra Somayaji

To contact Bloomberg News staff for this story: Stephen Engle in Beijing at sengle1@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net


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