China Pressures HSBC, Citigroup to Join Lending Spree

Feb. 20 (Bloomberg) -- China is prodding banks including Citigroup Inc. and HSBC Holdings Plc to support the weakening economy by accelerating lending, after the threat of defaults caused them to rein in credit last month.

Foreign banks should “increase their contribution” to China’s economy and lend more to small firms, the Shanghai branch of China’s banking regulator said yesterday. An earlier report showed advances by foreign lenders in the city dropped in January. Shanghai accounts for 61 percent of overseas bank lending in China, the watchdog said.

The demand for more funds comes as HSBC, Standard Chartered Plc, Bank of East Asia Ltd. and Citigroup -- the four largest foreign lenders by branches in China -- contend with credit losses and weakening economies at home. With Chinese banks first in line to lend to state-backed infrastructure projects, foreign rivals who chose to heed the call may have to shoulder more risk, said analyst Yang Qingli.

“Nobody can afford to stay on the sidelines anymore, even if it comes at the cost of lending to riskier companies,” said Yang, Beijing-based head of research at brokerage BOCOM International Ltd. “That’s what’s left for foreign banks now.”

Overseas banks cut local-currency advances in Shanghai by 1.78 billion yuan ($263 million) in January, even as local lenders extended a record 95 billion yuan of new loans, according to the city’s central bank branch. A year earlier, foreign banks boosted lending by 12.3 billion yuan.

Banks Retrenching

The bad-loan ratio at foreign banks increased to 0.83 percent in December, the highest since mid-2006, from 0.5 percent three months earlier, according to the regulator.

Chinese banks led by Industrial & Commercial Bank of China Ltd. have rushed to follow the government’s call for more credit, doling out 1.62 trillion yuan in loans in January -- more than double the previous monthly record. The loans binge has fueled concern that delinquent debt will pile up, just as China finishes a $650 billion cleanup of its banking system.

China’s economy grew 6.8 percent in the fourth quarter, the slowest pace in seven years, as exports collapsed.

Many of the global banks that moved into China after the nation fully opened its banking industry in December 2006 are now retrenching to nurse balance sheets savaged by writedowns. Citigroup, which got a $52 billion U.S. bailout, has earmarked units in Japan for sale. Royal Bank of Scotland Group Plc, rescued by the U.K. government, has pledged to increase lending at home and scale back business abroad.

‘Follow or Lose’

HSBC, the biggest European bank, may need as much as $35 billion in fresh capital as more U.S. loans turn sour, Morgan Stanley analysts estimate. Bank of East Asia, based in Hong Kong, this week posted its first loss in more than four decades.

Banks ignore China’s call for more loans at their own peril, said BOCOM’s Yang. “You either follow or you lose business, meaning the government probably won’t approve any new branches or new products,” she said.

Stephen Thomas, a Shanghai-based spokesman for Citigroup, said, “Citi China remains committed to supporting the banking requirements of our clients throughout 2009 and beyond.” Eva Chow, a spokeswoman at Standard Chartered in Shanghai, declined to comment, as did Bank of East Asia’s Xia Feng and HSBC’s Gareth Hewett.

Overseas banks are at a disadvantage as they don’t have the size locally or the political connections to lend to the road and rail projects at the heart of China’s $585 billion stimulus plan, said analysts including Lu Zhengwei.

Pet Projects

“Chinese and foreign banks have a similar assessment that the current credit risk is very high,” said Lu, an economist at Industrial Bank Co. “But Chinese banks can get those safer government-led projects and foreign banks just can’t.”

Bank of China Ltd. gave a 60 billion yuan credit line to Aviation Industry Corp. of China Ltd. on Feb. 6 after the State Council approved a support package for the aerospace industry. The lender in December agreed to extend 300 billion yuan to the government of Tianjin city.

China Construction Bank Corp. in December promised to offer 380 billion yuan of loans to Guangdong province for its energy, transportation and infrastructure needs. ICBC lent 69.3 billion yuan to power grids, roads, hydroelectric power projects and public works in January, about 27 percent of its total.

Decades of state-directed lending pushed the non-performing loan ratio at Chinese banks to almost 30 percent in 2000. The measure stood at 2.45 percent at the end of last year. Fitch Ratings said last month Chinese banks may be underestimating their bad-loan ratios, partly because of weak risk management.