China’s big banks rebuff government pressure to lower borrowing costs

China’s biggest banks are resisting government pressure to lower borrowing costs amid an economic slowdown as they seek to maintain the profitability of their lending operations, officials at the top four lenders said.

The banks are limiting discounts for their best corporate clients to 10% of the benchmark lending rate, the officials said, asking not to be identified as they’re not authorized to speak publicly. The central bank in July began allowing lenders to offer credit at 30% less than the benchmark rates.

Keeping borrowing costs high may blunt efforts to revive growth that has decelerated for six straight quarters in the world’s second-largest economy. Credit expansion is also limited by the central bank’s loan quotas, the officials said, highlighting the conflicting efforts within China to curb loan defaults while boosting funding for infrastructure projects.

Shares of Industrial & Commercial Bank of China Ltd., the world’s largest lender by market value, and its three closest domestic competitors, which are all based in Beijing, have climbed by an average 3 percent in Hong Kong this year, compared with a 14% gain in the Hang Seng Index.

The People’s Bank of China and the China Banking Regulatory Commission aim to avoid a repeat of the two-year, 17.6 trillion- yuan (US$2.8-trillion) credit boom that propelled economic growth in China following the 2008 financial crisis. That spending binge fueled inflation and led to three straight quarters of growth in soured loans by the end of June, marking the longest streak of deterioration in eight years.

 

The nation’s top planning agency and local governments, meanwhile, are pushing for credit to fund projects. The National Development & Reform Commission had approved more than 700-billion yuan of road and subway construction by the end of August, the 21st Century Business Herald reported yesterday. Local governments, which have committed 275-billion yuan for these projects, need to rely on banks for the rest.

At stake for China are efforts to bolster economic growth amid the global slowdown. Its gross domestic product expanded at the slowest pace in three years during the second quarter as the European debt crisis sapped export demand and efforts to rein in home prices eroded domestic consumption.

Two cuts by the PBOC to key interest rates this year, three reductions in the reserve requirements for banks since November and accelerated approvals for investment projects haven’t been enough to reverse the deceleration. The economy may expand this year at the slowest rate since 1999, according to the median forecast of 45 economists in a Bloomberg survey.

The central bank in June allowed lenders to widen the discount on borrowing costs to 20%, and then broadened the limit to 30% the following month, accelerating the liberalization of interest rates. The banks were permitted to offer deposit rates at 10 percent above the benchmark, marking the first time a premium has been permitted.

China’s benchmark one-year lending rate currently stands at 6 percent, while the deposit rate is 3%.

Giving the banks more flexibility to compete for funding amid a deposit crunch has triggered investor concern that the banks’ lending margins will probably shrink. The weighted average profit growth at Hong Kong-listed Chinese banks may have slowed to 6.4% in the third quarter from 21% in the first half, analysts at Citigroup Inc. said this week.

Bank of China Ltd., the country’s third-largest lender, is scheduled to report third-quarter earnings on Oct. 25, followed by Agricultural Bank of China Ltd., the fourth-largest, the next day. China Construction Bank Corp., ranked No. 2, plans to report on Oct. 29 and ICBC on Oct. 30.

A CCB press official declined to comment. Phone calls to the media offices of the other three lenders weren’t answered.

Though China hasn’t officially announced lending quotas or the total target for 2012, policy makers have indicated the goal is 7.5-trillion yuan to 8-trillion yuan. Banks had made 6.1-trillion yuan of new loans in the first eight months of this year, according to central bank data.

A lack of funding for local government projects may extend the economic slowdown in China, Song Guoqing, an adviser to the nation’s central bank, said last month.