Moral Hazard and the Coming Chinese Banking Crisis

From the new FT Tilt:

Though the fund raising activities of China's biggest banks and lenders may seem like standard procedure on the surface, they are more desperate for cash than some might think, just as the country's banking regulator moves to impose stricter capital requirements.

After embarking on an excessive lending spree in recent years, the banks have no choice but to raise cash as they prepare for a wave of bad loans, many of which are exposed to the property sector, according to Gary Liu, a deputy director at China-Europe International Business School (CEIBS) in Shanghai. ...

China's banking regulator has urged banks to reduce excessive lending to local governments, but Chinese banks still lent about the same amount in both 2010 and 2009. Local government infrastructure projects will require up to Rmb4,000bn in new loans next year, according to BNP Paribas estimates cited in the FT. ...

Bank of China's capital adequacy ratio dropped from 13.59 per cent in 2006 to 11.14 per cent by the end of 2009, according to Liu. According to the Basel Accord, the core capital adequacy should be above 8 per cent.

"The ratio is close to dangerous level. Bank of China's target ratio is no less than 11.5 per cent, so the rights issue is a must," Liu said.

But state-run banks, knowing they that any risk to the bank will be absorbed by the central government, will not be motivated to curb risky lending, said Wilson Li, a Shanghai-based analyst at Guotai Junan Securities, told FT Tilt.