Bloomberg News

UBS Says Worst of China Lending Panic, Hysteria May Be Over

October 11, 2011

(Updates with Wen’s visit in sixth paragraph.)

Oct. 11 (Bloomberg) -- The worst of the “panic and hysteria” over informal lending in China may be over as the city of Wenzhou works with businesses and the central government to stabilize credit, UBS AG said.

“The size of informal lending is relatively small and the concerns about the direct impact on the formal banking sector and the economy are exaggerated,” Hong Kong-based economist Wang Tao said in a note today. The “bigger risks are credit withdrawal in both the formal and informal lending market and contagion,” she said.

Media “hype” surrounding reports of Wenzhou factory owners fleeing after failing to pay their debts have unnerved investors concerned about Chinese banks’ asset quality and a slowdown in the property market, according to Wang. Lenders rallied today after state-run Central Huijin Investment Ltd. began buying shares of the biggest four banks to boost valuations that have fallen below levels reached during the global financial crisis.

Agricultural Bank of China Ltd. climbed 15 percent as of the noon break in trading in Hong Kong.

“Restructuring of businesses and debts will likely occur in the next few months in Wenzhou, with the help of bank liquidity and government involvement,” Wang said.

Wen’s Visit

Premier Wen Jiabao visited Wenzhou in Zhejiang province during a public holiday this month, urging greater support for small and medium-sized companies. The city is known for a “vibrant private sector,” non-banking lending, and speculative investment in property, Wang said.

Chinese media published conflicting reports today on recent developments.

China’s banking regulator has increased a loan quota for the city by 100 billion yuan ($15.7 billion), the 21st Century Business Herald reported, citing an unidentified person. It didn’t specify the time period concerned. The same person said that amount did not include 60 billion yuan in one-year bailout loans that the Zhejiang provincial government is seeking from the People’s Bank of China, the business newspaper said.

Separately, Guangzhou Daily said “rumors” of a 60 billion yuan facility were untrue, citing Zhang Yourong, director of the Wenzhou branch of the China Banking Regulatory Commission. No comment was immediately available from central bank press officials in Beijing.

Problems with non-bank lending may surface in other parts of Zhejiang and in Shanxi, Inner Mongolia, Fujian, and Guangdong, Wang said.

Wenzhou set an upper limit on the interest rates that private non-bank lenders can charge, the local government said Sept. 28. Those institutions can only lend at an interest rate that doesn’t exceed four times the country’s benchmark, according to the statement. The official one-year rate is 6.56 percent.

--Editors: Paul Panckhurst, Ken McCallum

To contact the reporter on this story: Paul Panckhurst in Beijing at ppanckhurst@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net


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