Although the China’s banks sailed through the crisis little scathed, worries are now mounting about a build-up in bad debt, especially in loans that have gone to the property sector. Bank of China, China Construction Bank and Bank of Communications are among those rushing to raise funds to bolster balance sheets stretched by a lending spree last year in support of government efforts to bolster economic growth.
Banks need to bolster capital adequacy ratios depleted by a record surge of 9.6 trillion yuan in lending last year. Much of the pressure to raise capital has come from the China Banking Regulatory Commission, which wants lenders to bolster their balance sheets against a potential surge in bad loans. The China Banking Regulatory Commission has instructed banks to lower their loan-to-value ratios in the property sector and demanded stricter classifications of collateral for real estate loans. Industry officials also said the CBRC had instructed banks to report on their exposure by the end of the second quarter.
Investors are concerned that there may be more demand for funds than investors can supply. China's banks have announced plans to raise more than $70 billion in an effort to replenish their capital levels. Analysts say they expect Beijing's regulators to delay approval of some banks' fund-raising plans if they think the market can't handle it, but the backlog of banks looking to raise funds continues to grow.
China's stock markets are already dragged down by Europe's sovereign debt crisis and investor concerns that Beijing's efforts to cool a property bubble may harm economic growth. A massive influx of new shares and debt may further push down share prices. And if banks aren't able to raise capital, it could hinder their ability to keep churning out credit to keep the economy humming. Market pressures have already forced Bank of Communications to reduce the size of their rights issue and Agricultural Bank of China might be compelled to settle for a lower IPO price target.
