(SBU) NANJING BANKERS NOTE SURGE IN GOVERNMENT PROJECT

UNCLAS SHANGHAI 000044


TREASURY FOR AMB HOLMER/WRIGHT/TSMITH
TREASURY FOR OASIA/INA -- DOHNER/HAARSAGER/WINSHIP/CUSHMAN
TREASURY FOR IMFP -- SOBEL/MOGHTADER
USDOC FOR ITA DAS KASOFF, MELCHER, MAC/OCEA
NSC FOR WILDER/LOI
STATE PASS CEA FOR BLOCK
STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/KATZ/MAIN
STATE PASS CFTC FOR OIA/GORLICK

E.O. 12958: N/A
TAGS: CH ECON EFIN EINV PGOV
SUBJECT: (SBU) NANJING BANKERS NOTE SURGE IN GOVERNMENT PROJECT
LOANS


1. (SBU) Summary. Chinese domestic and Hong Kong commercial
bank representatives in Nanjing confirmed that new lending for
government-sponsored projects surged in December and January.
Over the past year, said the officials, lending quotas
established by China's central bank have made the greatest
difference in loan issuance rates. Provincial governments,
however, set lending priorities; both the Jiangsu Governor and
the Jiangsu vice governor in charge of financial affairs
pressured banks to fall in line at an October meeting.
Nonetheless, some Nanjing banks are finding it difficult to
fulfill instructions to lend to small and medium-size
enterprises. End summary.


2. (SBU) Congenoffs met on January 21, 2009, with Lin Fu,
Chairman of the Board, Bank of Nanjing; Sheng Hong, Assistant
Executive President, Nanjing Branch, China Everbright Bank; and
Leo Lai, General Manager and Head of Business Development,
Nanjing Branch, Standard Chartered Bank (please protect). Bank
of Nanjing has close relations with the municipal government,
which is the bank's single largest shareholder (at 12.9
percent); French bank BNP has 12.6 percent strategic stake.
(Note: Lin himself is the former deputy director of the Nanjing
Municipal Finance Bureau, and he confirmed Bank of Nanjing
continues to hold bureau-level status within the municipal
government. End note.) The Everbright Nanjing Branch operates
throughout Jiangsu Province, except for Suzhou (where there is a
separate Everbright branch),and holds a 5 percent market share
of banking activity in Nanjing; it has not yet been able to
issue an IPO. Standard Chartered has been in Nanjing for over
15 years, and is the largest foreign bank in Nanjing; given the
strong local competition, it focuses on interest rate swaps,
currency exchange, and cash management for foreign firms.

============================
Surge in Loans for Government Projects
============================


3. (SBU) The Nanjing bank representatives confirmed new lending
for government-sponsored projects surged in December and
January. Everbright's Sheng told Congenoffs that his branch's
new lending in the first twenty days of January alone equaled
total lending in 2008. (Note: Congenoffs later reconfirmed this
statistic with Sheng's staff. End note.) Sheng explained that
Everbright by October 2008 had many loans which had been fully
vetted and approved, but People's Bank of China (PBOC) lending
restrictions meant that projects were queued up by priority to
receive funds. Once the PBOC began encouraging lending in
October, Everbright was able to release funds for multiple
projects simultaneously. Bank of Nanjing's Lin offered a
similar picture, explaining that Bank of Nanjing took a few
weeks to review its loan backlog in October and November, and
then began a surge of credit issuance in December.


4. (SBU) Lin and Sheng agreed that it was the PBOC lending
quotas that made the greatest difference in their loan issuance
rates. Sheng went as far to say that the PBOC's changes in the
required reserve ratio for banks (the amount of deposits
required to be kept in reserve and not loaned out) and base loan
interest rates made no difference for his bank--"These matter
only to our head office in Beijing," he noted. Lin said PBOC
loan quotas forced Bank of Nanjing to invest much of its RMB6.7
billion (currently approximately US$1 billion) 2007 IPO proceeds
in Chinese government bonds, leading to it being known as the
"Bond Bank." Bank of Nanjing currently has 40 percent of its
assets in bonds, said Lin.


5. (SBU) Local governments set lending priorities, our contacts
indicated. Sheng said Everbright was focused on loans that
support Jiangsu's urbanization, provincial industries, local
small and medium-size enterprises (SMEs),and consumer credit.
He emphasized Everbright's loans to provincial enterprises
centered on enhancing their competitiveness in international
markets rather than reorienting their production toward China's
domestic consumers. Sheng acknowledged the Central Government's
effort to increase the economy's reliance on domestic demand,
but argued such a transformation was too difficult in the short
term. For instance, Everbright, Nanjing, is the largest
creditor of the Xugong Group, a manufacturer of heavy
construction equipment based in Xuzhou, Jiangsu, and has
extended several billion yuan in loans to Jiangsu shipbuilders.
Sheng also revealed that much of the new lending in December and
January has been channeled through local government investment
corporations. Standard Chartered's Lai said he had heard that
the Jiangsu authorities are guaranteeing the new loans, but he
has not been able to confirm this.


6. (SBU) Bank of Nanjing's Lin gave expansion of local
universities and highways as examples of his bank's lending to
locally supported projects. One university wanted to speed up
its three-year expansion project, said Lin, and therefore
borrowed funds equivalent to the budget for the project's second
and third years from the Bank of Nanjing; Lin said the loan risk
is minimal, because the bank can be repaid from the university's
allocations from the government over the coming two years.

============================
Local Government and Regulators Push Lending in October
============================


7. (SBU) Everbright's Sheng offered further details on the
Jiangsu Government's efforts to increase lending in the fourth
quarter of 2008. The Jiangsu Provincial Government's Financial
Affairs Office (jinrong ban) called a meeting in October meeting
that was attended by both Jiangsu Governor Liang Baohua and the
vice governor in charge of financial affairs. It was the first
time in his twenty years in the banking industry to see top
officials come together to focus on banking affairs in this way,
said Sheng. According to Sheng, Jiangsu will be compared
against Zhejiang and Guangdong in terms of loan growth rates,
and "None of the provinces wants to be last."


8. (SBU) The bank representatives suggested that Nanjing banks'
response to local government guidance since October is out of
line the trend that bankers are less susceptible to official
interference. Nevertheless, Everbright's Sheng said that
although he attends all meetings called by local and provincial
financial officials, he generally is easily able to deflect
their requests by saying that the bank's head office in Beijing
does not approve.

============================
Continuing Caution on SME Lending
============================


9. (SBU) Everbright's Sheng said banks find it difficult to
fulfill regulator's instructions for lending to SMEs. (Note:
SME lending is a priority under the Central Government's RMB4
trillion fiscal stimulus package announced November 9. End
note.) The China Bank Regulatory Commission requires banks to
maintain credit growth for SMEs, said Sheng, but there are few
opportunities where the return matches the risk. As an example
of SME lending Everbright can undertake, Sheng cited loans to
Jiangsu car dealers for new car purchases where the vehicles are
used as collateral. If the dealer is not able to repay the
loan, he said, under the terms of the loan the cars can be
resold by the bank to the manufacturer.

============================
Comment
============================


10. (SBU) Initial signs in Jiangsu Province are that banks and
local governments have embraced the opportunity offered by the
Chinese Central Government's RMB4 trillion fiscal stimulus
package to ramp up investment in infrastructure and enterprises.
Less certain are the intentions of local governments to push
China away from a focus on investment and exports and towards
domestic consumption as a stronger economic driver.


CAMP