BANK LENDING REVIVES GROWTH IN EAST CHINA'S ZHEJIANG

UNCLAS SECTION 01 OF 05 SHANGHAI 000059 SENSITIVE SIPDIS DEPT FOR EAP/CM NSC FOR MEDEIROS, LOI, SHRIER STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/KATZ/MAIN USDOC FOR ITA DAS KASOFF, MELCHER, SZYMANSKI, MAC/OCEA TREASURY FOR OASIA/INA -- DOHNER/HAARSAGER/WINSHIP TREASURY FOR IMFP -- SOBEL/CUSHMAN STATE PASS CEA FOR BLOCK STATE PASS CFTC FOR OIA/GORLICK MANILA FOR ADB USED PARIS FOR US/OECD E.O. 12958: N/A TAGS: ECON EFIN EINV PGOV CH SUBJECT: BANK LENDING REVIVES GROWTH IN EAST CHINA'S ZHEJIANG REF: SHANGHAI 041 ¶1. (SBU) Summary: Despite the downturn in traditional export markets, East China's Zhejiang Province kept pace with average Chinese lending growth last year, helping to boost GDP growth by year end. Zhejiang has issued support plans for eleven industries, but is attempting to focus new financing on small- and medium-size enterprises (SMEs) -- the traditional industrial base of this entrepreneurial province. Zhejiang's financial regulators greatest concerns lie with combating inflation expectations in the wake of this lending boom. End Summary. ============================================ Government Jumpstarted Growth in 2009 . . . ============================================ ¶2. (SBU) The Central Government's relaxed monetary policy and fiscal stimulus played the major role in Zhejiang's economic growth of 8.7 percent in 2009, according to Hangzhou-based banking regulators and bankers who spoke with EconOff on January ¶21. Li Hong, deputy president of the Hangzhou Sub-branch of the People's Bank of China (PBOC),said new lending in Zhejiang last year was over RMB900 billion (approximately US$132 billion), amounting to about one-tenth of total new lending in China during the period. (Note: One-tenth is in line with the historical ratio of total loans in Zhejiang to total loans in China, according to PBOC data. End note.) Tian Dazhang, Deputy Head of the Zhejiang Regional Headquarters of the Industrial and Commercial Branch of China (ICBC),confirmed his bank lent out an "enormous amount" -- RMB70 billion (approximately US$10 billion) in 2010 -- although he noted ICBC was third in new lending in 2009 behind Bank of China, which took top place with RMB97 billion (approximately US$14 billion),and the China Construction Bank. ¶3. (SBU) In terms of fiscal stimulus, PBOC's Li noted Zhejiang issued support plans for eleven industries, one more than the number of industries specified for national support by the Central Government in connection with the 2008 stimulus package. Zhejiang included construction and transportation, but not the logistics sector, which was in the Central Government's plan. (Note: The nine other industries enjoying support from both the Central Government and Zhejiang are iron and steel, automobiles, shipbuilding, petrochemicals, light industry, textiles, nonferrous metals, equipment manufacturing, and electronics and information industries. End note.) Li said 16 to 17 percent of new lending in the province went into stimulus projects, acknowledging this was a low percentage compared with other provinces because of the predominance of Zhejiang's private sector. ICBC's Tian said his bank has a share in lending to all government stimulus projects. ¶4. (SBU) The traditionally low share of the government sector in Zhejiang's economy placed some limits on the number of official stimulus projects that could be rolled out on short notice, said PBOC's Li. (Note: According to Zhejiang officials, 99.9 percent of Zhejiang enterprises are SMEs, most of which are privately owned. End note.) Zhejiang provincial officials did not have as many infrastructure projects lined up, because, for example, the highway system is already relatively complete, and there are few large state-owned enterprises. (See reftel.) ICBC's Tian said his bank's headquarters required that infrastructure loans be tied to future returns, such as user SHANGHAI 00000059 002 OF 005 fees or land sales, so ICBC will not lend for "pure" public works projects, such as parks. ============================================= = . . . Pulling Enterprises Back from the Abyss ============================================= = ¶5. (SBU) Contacts pointed to the winter of 2008-09 as the low point for Zhejiang's economy during the current crisis. Yang Xiaoping, director-general of the Zhejiang Office of the China Banking Regulatory Commission (CBRC),said in 2009 growth was slowest in the first quarter, and thereafter picked up quarter by quarter. According to the National Bureau of Statistics, first quarter 2009 economic growth in Zhejiang was 3.4 percent compared with the same period the previous year, while national growth for the same period was 6.2 percent; for the first half of 2009 Zhejiang grew 6.3 percent, compared to 7.1 percent nationally; for the first three quarters, both figures were 7.7 percent; and for the full year, both figures were 8.7 percent. ¶6. (SBU) ICBC's Tian said the fourth quarter of 2008 was the worst time for Zhejiang's SMEs, and SME bankruptcies were clearly reflected in ICBC's books. However, Tian said following the 2009 Lunar New Year holiday 70-80 percent of Zhejiang companies had recommenced production -- ICBC confirmed this by visiting clients to determine if, among other indicators, they could hear machinery running in the factories. (Note: Lunar New Year 2009 began on January 26. End note.) ===================================== Automobiles a Focus in Zhejiang, Too ===================================== ¶7. (SBU) The nationwide boom in car sales was cited as a specific factor driving Zhejiang's growth in 2009. CBRC's Yang said stimulus policies helped to promote domestic consumption of cars and home appliances. Yang pointed to the Wanxiang Group as an example of companies benefitting from the stimulus, with sales and profits each up 60 percent for the year 2009, while revenues have increased monthly since March of last year. (Note: Wanxiang is a Zhejiang-based conglomerate that has major business lines in auto parts, agricultural goods and farm equipment, and real estate. End note.) China Development Bank's marketing of consumer automobile loans was cited by PBOC's Li as an example of financial innovation driving economic growth in the province. The value of Zhejiang's car sales rose 30 percent in 2009, according to the Zhejiang Bureau of Statistics, in line with the National Bureau of Statistics figures of 32 percent growth for all China. ========================================= Tailored Help for Local Businesses . . . SHANGHAI 00000059 003 OF 005 ========================================= ¶8. (SBU) The Zhejiang government reached out to aid local businesses during the global financial crisis. Chen Zhou, deputy director of the Foreign Capital Utilization Section of the Zhejiang Development and Reform Commission, said provincial leaders organized teams from various provincial departments to establish temporary offices in towns around the province to help firms cut through red tape -- for example, in registering businesses with the State Administration of Industry and Commerce. Yang said the CBRC asked banks to "help firms get out of trouble," while at the same time pushing undesirable firms -- such as heavy polluters -- out of the market. ¶9. (SBU) Zhejiang has special conditions that call for policies different from those of the Central Government, our contacts said. For instance, PBOC's Li said the Central Government is concerned about overcapacity in textiles, but Zhejiang's approach is different. Since textiles is a pillar industry in Zhejiang, the province has decided it would be better to help textile manufacturers become more competitive and profitable, rather than pushing them out of business, said Li. Li also cited the support China Construction Bank in Zhejiang is giving to the local shipbuilding industry. ===================== . . . Including SMEs ===================== ¶10. (SBU) Given the predominance of Zhejiang's private sector, the provincial authorities are promoting new channels for SME finance. The Zhejiang CBRC -- in line with national CBRC guidelines -- ordered all banks to establish dedicated departments for SMEs. CBRC's Yang said these departments are required to be separated from other operations by having special performance ratings for SMEs, special pricing of SME financial products, and personnel dedicated to SME-related operations. In 2009, 85 percent of new lending province-wide went to SMEs, said PBOC's Li. (Note: According separate PBOC statistics, just over 58 percent of new lending to corporations nationwide went to SMEs in 2009. End note.) ¶11. (SBU) ICBC is exemplary in efforts to finance SMEs, said CBRC's Yang, and by year end 2009 has established 100 subbranches in Zhejiang Province for SME business. However, ICBC's Tian detailed the difficulties China's biggest commercial banks face in serving SME clients. He noted 70 percent of ICBC Zhejiang Branch loans went to SMEs in 2009 -- below the provincial average cited by the PBOC -- which would be further reduced to 50 percent if ICBC Zhejiang lending through the headquarters asset pool is included. ICBC is having some success putting SME financial services online, for the convenience of clients, but nonetheless faces high SME client turnover -- 30 percent of SME clients go out of business each year -- and the vetting of new SME clients must be done in person. SHANGHAI 00000059 004 OF 005 ============================================= = High January Bank Lending Not Worrisome . . . ============================================= = ¶12. (SBU) Contacts downplayed the possibility of a Central Government crackdown on bank lending in the wake of a large volume of new lending in early January. PBOC's Li said new lending in January was not a good indicator of trends in 2010, since there is always a rush to lend at the beginning of the year -- this then locks in a full twelve months of interest payments -- and that in addition, there was pent up demand from the low lending at the end of 2009. ICBC's Tian also suggested the January surge was a one-off, saying many of the loans issued in January were for projects prepared in the fourth quarter last year. ¶13. (SBU) Our contacts also denied the PBOC had moved in late January to penalize overly fast lending. Chinese media widely reported some banks were being required to set aside reserves, an administrative move the PBOC can use to restrict the bank lending base. CBRC's Yang said she knew of no Zhejiang-based banks being penalized in this manner, and ICBC's Tian also asserted his bank was not facing these restrictions. Yang noted that regulators may have to wait for the end of the month, as banks are not required to report mid-month statistics. (Note: Subsequently on February 11 the PBOC announced new lending in January soared to RMB1.39 trillion -- from RMB380 billion the previous month -- and on February 12 raised required reserve ratios (RRRs) by an additional half percentage point, a move that many analysts say signals a PBOC bias toward a somewhat tighter monetary policy. End note.) ====================================== . . . But NPLs and Other Risks Rising ====================================== ¶14. (SBU) Regulators in Zhejiang are increasing oversight of new lending to reduce the potential for future problem loans and inflation. According to PBOC's Li, the overall balance of nonperforming loans (NPLs) increased by RMB4.5 billion in Zhejiang Province last year, although the ratio of NPLs dropped by 0.26 percentage points because the overall amount of lending increased. (See reftel.) Local governments have also increased funding to bail out firms that get into trouble, said Li. While Li acknowledged that momentum in lending will stay high, in order to service projects begun last year, the PBOC is requiring that 80 percent of lending by large banks -- and 70 percent of lending by smaller banks -- go to existing projects; new projects will have to be "carefully evaluated." CBRC's Yang said that by January 23 banks needed to submit a draft oversight system for ensuring that loans do not flow into speculation in the real estate and stock markets. Currently, Zhejiang banks have attained a 180 percent coverage ratio for NPLs, said Yang. SHANGHAI 00000059 005 OF 005 ¶15. (SBU) One problem with combating inflation expectations, said Li, is that "it is very difficult to forecast." The consumer price index (CPI),he observed, does not actually reflect what consumers are experiencing with respect to increases in their cost of living, because the CPI components are not weighted correctly. Compounding the problem from Li's perspective, inflation is increasingly based on international factors, such as commodity prices. CBRC's Yang said the Central Government may put controls on some prices to stave off inflation, but that currently the government's main job is controlling inflationary expectations. The PBOC RRR increase was a signal to the market that it is serious about this task, said Li. ======= Comment ======= ¶16. (SBU) Zhejiang's financial regulators appear well aware of the potential danger of increasing nonperforming loans following 2009's lending boom but, as of early 2010, also have little incentive to apply the brakes too hard on local enterprises -- best exemplified by their "wait and see" attitude on stanching new loan growth. An additional danger is that Zhejiang authorities will be tempted to support the growth of larger enterprises, or even encourage the formation of new state-owned conglomerates, in order to better tap Central Government-approved financing. Hints of that approach can be seen in the enhanced delivery of government services to local businesses during the financial crisis, but more worrisomely in the case of the potential benefits channeled to a local autoparts manufacturer. Nonetheless, Zhejiang continues to be an exemplar of private entrepreneurship, and buoyed by its late 2009 recovery, will most likely remain largely on that path. BEEDE