China's banks bet on borrowing - Finance

Business Asia, March, 2003

Shen Hanfeng and people like him are of China's banking sector. The sales engineer, who is getting married next year, recently took out a 280,000 yuan ($55,303) mortgage on an apartment in Shanghai, joining a growing number of people in this nation of savers who are beginning to take on debt. "Getting a loan was no trouble at all. From the signing to actually getting the money took just two weeks," Shen said. "Nowadays everything is really smooth, the banks have become extremely efficient."

Just five to 10 per cent of bank loans in are made to individuals--mostly for mortgages--compared with 40 per cent in Hong Kong and 40 to 50 per cent in South Korea, analysts said.

But as incomes rise in cities such as Shanghai, and China encourages consumers to play a bigger role in the economy, loans to individuals will grow by 30 per cent or more per year over the next two or three years, UBS Warburg analyst Tracy Yu predicted.

Savings pot

Chinese, many of whom lived through tumultuous decades and recently have seen the erosion of state-provided jobs, housing and pensions, have squirreled away US$1.2 trillion ($1.96 trillion) in savings.

Banks, including foreign lenders that are set to enjoy market access on par with local peers by 2007, are keen for a piece of a market that is growing much faster than corporate lending.

"The biggest opportunity, not just for us but for the economy, is the emergence of consumer demand driving the economy," Richard Stanley, Citigroup's top officer for China, said in an interview at its offices in Shanghai's Pudong financial district.

Safe bets

The infamous amount of non-performing loans at China's big state banks, which some analysts believe approaches 50 percent, was incurred as banks lent to bloated state-owned enterprises.

Consumers, on the other hand, are only beginning to borrow on a broad scale and are proving to be a safe bet, partly because home buyers tend to be reliable credits.

Bad loan levels for consumer borrowers are "really, really low", said Bank of China International analyst Anthony Lok. "Three to four years ago, mortgages were virtually non-existent in China," said Lok. He figures that mortgages now total roughly US$80 billion, compared with total loans in China of about $1.3 trillion.

Credit cards are only recently becoming more than a novelty in China, while cars are still overwhelmingly paid for in cash.

Beijing realises that with 1.3 billion people, China can't simply export its way to prosperity as Asia's "Tiger" economies have done, and that domestic demand must grow, Lok said.

"The two major big tickets, if you look at developed economies in terms of consumption, in terms of demand.... are autos and home purchases, and so those are two of the key areas that the government wants to push," Lok said.

China's big four state banks--Bank of China, Industrial and Commercial Bank of China, China Construction Bank and Agricultural Bank of China--operate tens of thousands of branches and control more than 90 percent of banking assets. With huge deposit bases those banks enjoy low funding costs and will thus be formidable players for volume products such as mortgages. Foreign banks are expected to target higher-end customers. "There is such a vast market, the foreign banks have to position very, very carefully, in these market segments," said Aman Mehta, chief executive of giant HSBC Holdings PIc's Asia operations.

Reuters