In a significant decline in economic growth period, the business is necessarily difficult, will certainly increase the risk of bank lending, the bank profit maximization, bank loans should shrink. In addition to China bank, the global banking industry in this round of economic crisis is to do so. Although this will further exacerbate the economic crisis, but the bank apparently have no obligation for some business difficulties enterprise's death and burial.

 

   No matter how stressed the importance of bank to the national economy can not be overemphasized. In 1929 American stock market crash, the economic crisis began, eventually evolved into a depression. The Japanese stock market crash of 1990, the economy has no obvious improvement. The 2007 subprime crisis, USA economy suffered a major blow. USA new economic bubble burst in 2000, the stock market also entered a bear market, but the economic fundamentals. Be quite different the four crises result, the fundamental reason is that the state of the banking industry are not the same. Three times before the crisis, the major problems of the banking business, resulting in a large number of non-performing assets, many bank failures, the most important thing is not the normal loans. Such a large number of enterprises can not obtain bank financing, dragging down the economic recovery. And USA new economic bust of 2000, no negative impact on the quality of bank loans, business and consumer loans were issued, the impact of the crisis on the state of the economy is less. Therefore, during the economic crisis the contraction of bank loans of self-protection behavior be without rebuke. But China banks only on the first half of the year is equivalent to about the issuance of central bank credit lines, nearly 150% of the loans, non-performing loans in the future will increase.

 

   The following 3 conditions, has a great effect on the future China bad loans in the banking sector:

   (a) China debt paying ability has been improved to a certain extent

  

   Produce large amounts of bad loans Chinese banking in 1990, Chinese widespread corporate debt ratio is too high, but low profits. 5000 industrial enterprises issued by the people's Bank as an example, in 1993 September -1999 year in December, the average debt to asset ratio is 62.95%, the average cost of sales profit rate is 3.49%, at the beginning of 2000 -2008 in November, respectively 58.55% and 8.38% (Figure 11). In 2008 November, China enterprise is difficult in management, debt rate and cost of sales profit rate is respectively 59.5% and 7.4%, the average level is not only good in the 1990's, the better to Chinese economy at a low ebb when the level of 1998-1999. As borrowers enterprises in the indebted rate falls, the profit rate, is unable to repay the loan principal and interest rate decreased more than 1990 years, the risk of the banking business also declined.

 

   (two) the bank's own ability to resist risks increased

   The following changes in China banking operation, causing banks anti risk ability is stronger than a few years ago in the quagmire of non-performing loans:

   1, banks operating leverage ratio decreased

   Over the past Chinese banking is very radical, taking too many risks. At present the bank management is relatively conservative, business risk relative decline, mainly reflected in the following 4 indicators:

   One is the loan to deposit ratio. The bank loans and deposits ratio. Bank loan to deposit ratio is high, the operating lever.China banks' loan to deposit ratio as high as 125.59% in 1990, in 1998 and 1999, Chinese economic growth at a low ebb, is still as high as 90.41% and 86.17%(Figure 12). In 1995 July started the implementation of the "commercial bank law" thirty-ninth article expressly provides "loans and deposits ratio should not exceed seventy-five percent". But the effect of this requirement until tenth years after the law, China banks will loan to deposit ratio dropped to below 75%. Obviously, the loan to deposit ratio is too high is an important reason why the previous high rate of bad loans in the banking sector. As of 2009 September, bank loan to deposit ratio of only 66.86%, far lower than the former.

 

 

   Two is the capital adequacy ratio. Banking is a highly leveraged business, capital adequacy rate is high (low), operating leverage is small (large), the risk is small (large). From the index of the rights and interests of the owners and bank loans, 2001-2004 is declining (Figure 13). At that time China banking capital adequacy ratio is very low, the risk of operation is very large.At the end of 1997, the total assets of the four major state-owned banks to 8782200000000 yuan, the capital of only 306200000000 yuan, the capital adequacy rate of only about 3.5%, the core capital adequacy ratio is lower, and it also does not take into account the provisions against bad loans factors. At present, China banking capital adequacy ratio is higher, from four major banks in the first half of 2009 data, far higher than the CBRC's capital adequacy ratio of 8% (the core capital adequacy ratio 4%) requirements (Table 1).

Table 1 part of bank capital adequacy ratio
	Capital adequacy ratio (%)	The core capital adequacy ratio (%)
Industrial and Commercial Bank of China	12.09	9.97
Chinese bank	11.53	9.43
Construction Bank	11.97	9.30
Bank of Communications	12.57	8.86

 

 

   Capital adequacy ratio is high, not only the management risk of smaller, but even more bad debts, may not need the central government assistance, financing in the capital market the amount will be less, dragged down by a smaller probability of the whole society.

 

   The three is the deposit reserve rate. The deposit reserve rate is high (low) regulations of the people's Bank, bank loans less (more), operating leverage is smaller (larger). In 1988 January -1998 year in February, the bank deposit reserve rate maintained at 13% (Figure 14). In 1998 March, in order to save the operating difficulties, large losses of state-owned enterprises, the maintenance of social stability, the people's Bank will deposit reserve rate of one-time dropped from 13% to 8%. In 1999 November once again down to 6%, encourage banks to increase lending. This is one of the important reasons of bad bank loans increased sharply later. At present, China bank deposit reserve ratio is still as high as 13.5%. Some extent restrain bank lending space, reduce business risk.

 

   Four is the NPL provisioning rate. CBRC requires commercial banks non-performing loan provision coverage at the end of the year reached 150%. Major banks at or close to this level, and joint-stock banks are generally higher than this level (Table 2). And at the end of 2001, the four major state-owned banks loan loss reserve is only 60500000000 yuan.

Table 2 NPL coverage ratio
	Provision for coverage (%)		Provision for coverage (%)
Industrial and Commercial Bank of China	132.02	Bank of Communications	168.12
Chinese bank	126.47	China Merchants Bank	219.31
Construction Bank	141.75	Shanghai Pudong Development Bank	218.32

Data sources: banks Annual Report

 

   Increased 2, commercial banks operating profit

   Several factors, making the current banking profitability compared to the 1990's, has been enhanced obviously.

   One is the rate maintained at a relatively high level. In 1990, the same period of the loan interest rates lower than the deposit interest rate. In 1996 May, a year and the 5 - year bank loan to deposit the spread between long at a level of about 1% (Figure 15). This was mainly rely on bank loans profitable banks, forming a greater pressure on the operation. At present, although the low interest rates, banks in the same period limit spreads are still maintained at a relatively high level. A year and five year period loan deposit spread respectively 3.06 and 2.34 percentage points. The same 3 point differential, under the 5% interest costs and 10% of the interest cost is not the same to the bank. Bank loan interest rate (the same period hair term loan to deposit interest / deposit rate *100%) is also at a high level, one year and five years were 136% and 65% (Figure 16).

 

 

 

   Two is the intermediate business income increase. Although intermediate business banking income still accounts for less than 10% of the proportion of income, but compared to the 1990's is almost entirely dependent on the interest margin of profit model, have made great progress.

 

   Three is the tax cost reduction.Before the business tax rate bank in 2001 as high as 8%, now down to 5%, income tax rate in 1997 from 55% down to 33%, 2008 from 33% to the current 25%.

 

   Four is the bank losses or meager profit point cut. In 1994 four major state-owned banks a lot of additional outlets, but more than 95% long-term profitable outlets are located in 6 Shanghai center of the coastal city. From 1998-2002 year, the four major state-owned banks were reduced 1/3 institutions, a total of 55000, the cumulative reduction personnel 556200 people. To reduce operating costs, improve efficiency.

 

   Five is not the standard operating loss. In the past because of bank management is not standardized, also formed a more non credit assets losses. In 2001 December -2002 year in February, to the survey of the four major state-owned bank non credit assets losses of people's Bank of China, the loss rate is estimated to be 8.7%. These non credit assets losses are mainly: nominal income and interest receivable, mortgage assets loss, loss of housing reform formation, interbank lending losses, loss of self entity, illegal guarantee and letter of credit losses...... At present the bank management level has improved, this loss reduction.

   Maybe not the China banking profits too much before, but too little. The per capita profit as an example, the four major state-owned banks in 1997 per capita profit is only 1564 yuan, in 2002 increased to 9181 yuan, while in 2008, the per capita less profitable line has reached about 290000 yuan.

 

   (three) the local government financing platform will be the biggest risk of bank loans

   The people's Bank on 2001 China bad loans in the banking sector survey of the formation reasons:Bank non-performing loans mainly because of improper government intervention, due to internal management of the banks accounted for only 20%(Table 3).

  

Table before 32001 non-performing loans Chinese banking causes
Policy directed lending	30%
Planning and administrative intervention	30%
Structural adjustment of national arrangements	10%
Local intervention	10%
A bank's internal management	20%

  

   Without considering the people's Bank of the survey results and the real situation of the gap, the government is the main cause of Chinese banking was a huge amount of non-performing loans of banks operating intervention. In the present China profit margin improvement, indebted rate falls, debt paying ability, improve, and China bank general operating leverage ratio decreased while the profitability to improve the situation, the future China banking non-performing loans or will focus on local government financing platform loan.

   The so-called local government financing platform, including local government set up the different types of city construction investment company, urban construction development company, urban construction asset management companies, such as different types of companies, the companies generally can reach financing standard flow through the allocation of land and other assets to form a company assets and cash, if necessary, supplemented by financial subsidies as the repayment commitment, focus will be integrated into the capital investment in municipal construction, utilities and other projects. It is non transparent operation, low profit ability (may even consider only increase local economies of scale without considering the profitability of future), banks are at a disadvantage in lending relationship, could not be used as normal loans effectively monitoring loans. Therefore, loans to local financing platform loan is a high-risk loans.

   And this is precisely the local financing platform loan growth is very fast. According to preliminary statistics, at present there are more than 3000 of all levels of government investment and financing platform, of which more than 70% for the county level Platform Co.At the beginning of 2008, the investment and financing platform of local governments at all levels of debt totaling 1 trillion yuan, to 2009, then rose rapidly to 5 yuan of above, most of which came from bank loans.

 

   Repayment commitment and guarantee of the local government financing Platform Co, seems to make these loans risk is very low. This year, many local banks and even for the loan project. This probably is an illusion of the bank, there are 3 reasons:

 

   First the government loan guarantees have flaws in law."Guarantee law" eighth stipulates clearly "state organs cannot be guaranteed, but with the approval of the State Council for the use of loans from foreign governments or international economic organizations on the exception". Not only that, because of the local court funds from local governments and other reasons, have bigger influence decision and implementation of local government to the local court. When the local financing platform loan default on loans, bank loans through judicial channels will face a difficult recovery. Moreover, such as loan risk exposure to local government next term, it was the government more reluctant to the government's debt to pay the price.

 

   Secondly, the local government financing platform for investment project investment income rate is very low, part of the project will only loss, no profit. The overall earnings outlook is not optimistic.

   In the case of highway. All positive new highway. According to the Ministry of transport published "the first half of 2009, highway and waterway transportation economy operation": the new construction of expressway construction project 111, construction mileage of 12000 kilometers, a total investment of about 700000000000 yuan, year-on-year growth of 3.6 times, 5.9 times and 6 times. But the highway net profit growth has been rapid decline (Figure 17). Partly because the expressway started in developed economy, a lot of traffic area. The highway starts late, the diminishing marginal effect of investment; on the other hand, China expressway has been relatively surplus. By the end of 2008, the national highway mileage of 60302 km, second only to USA. In 1997 Chinese per kilometer highway the car retains the quantity is 609 (Figure 18), in 2008, still only 1078 vehicles / km, below with much land and few people in canada.

 

 

   Calculated according to the "China Times" of the "experts from the Ministry of Transportation Highway criticized Chinese too waste" one article: "according to the national highway 80000 kilometers, per kilometer construction fund 50000000 calculation, about 4 trillion of investment, including 70-80% of bank loans, about 3 trillion. One year interest rate is about 100000000000, but the annual toll is about 100000000000, the money is not enough interest, the risk of bad debts is very high."

 

   Look at the airport. Chinese in addition to several large airports, more than 150 civil airports most losses. The airport is only built in economically developed areas, with the scale effect, may be profitable. In 2008, Chinese top 6 airports, 48.06% of the total passenger throughput, cargo throughput of more accounted for 71.09% of the total. Even the old airport, due to unreasonable layout, ahead of construction, a number of airport utilization rate is not high, serious losses. Fuyang after the completion of the airport overgrown with weeds, no aircraft taking off and landing. Mianyang and Chengdu distance only 130 kilometers, in the scope of radiation in Chengdu airport. But Mianyang still built in 2001 south of Mianyang International Airport, the completion of the initial utilization rate is very low, there is no international flights between. The local government to build the airport short-term can effectively stimulate GDP, but due to lack of scale effect, most city airport can not see the earnings potential. Bank credit funds such as on the branch line airport project, is likely to be more bad loans.

Table 4 China 6 airport traffic share
Airport	Passenger throughput ratio (%)	Cargo throughput ratio (%)
Beijing	13.79	15.48
Guangzhou	8.24	7.76
Pudong Shanghai.	6.96	29.47
Hongqiao Shanghai.	5.64	4.71
Shenzhen	5.27	6.77
Chengdu	4.25	4.22

Data sources: the General Administration of Civil Aviation

 

   In fact Chinese banking non-performing loans has been rising momentum.

   Due to this year's new loans, long-term loans accounted for a larger proportion. Seems to be rising non-performing loans is many years later. In fact, a careful analysis of the first half of the year listed bank earnings, can discover the non-performing loans of the banks has been "hidden" rise.

   This year China banking industry in the first half of the overall nonperforming loans continued to "double down", non-performing loans decreased by 42125000000 yuan, non-performing loan ratio dropped 0.63 percentage points. But the joint-stock banks overall nonperforming loans rose by 1522000000 yuan (the same period last year dropped to 12930000000 yuan). Part of the big state-owned banks non-performing loans dropped, because of increased bad loan write off efforts (Table 5). Such asICBC, although the first half of non-performing loans decreased by 5817000000 yuan, but if 8276000000 yuan of bad loan write off bad loans, the actual still increased.The disposal of non-performing loan amount is higher than the bad loan write off amount. According to the "financial" magazine, China Construction Bank and Bank of China the first half were disposing of the non-performing loans of 196 yuan and 16400000000 yuan. Listed joint-stock banks, most is "single", or even double. 11 listed joint-stock banks, only the Shanghai Pudong development, livelihood, Beijing bank non-performing loans is negative growth, and the decline is very limited, Shanghai Pudong Development Bank fell only a mere 2000000 yuan. The deep development of non-performing loan "outshines others" appeared on the "double" (Table 5).

In 52009 the balance of bad loans on the table listed banks and rate of change
	Non-performing loan balance changes (million)	The non-performing loan rate change (%)	Bad loan write off amount (million)
Industrial and Commercial Bank of China	-58.17	-0.48	82.76
Construction Bank	-66.74	-0.5	37.07
Chinese bank	-100.03	-0.85	56.96
Bank of Communications	5.66	-0.41	20.36
China Merchants Bank	2.47	-0.25	2.92
China CITIC Bank	7.46	-0.37	0.14
Shanghai Pudong Development Bank	-0.02	-0.31	0
Minsheng Bank	-1.2	-0.34	9.11
Industrial Bank	1.64	-0.16	0.29
Huaxia Bank	1.26	-0.27	8.66
The development of deep	5.44	0.04	0.57
The Bank of Beijing	-1.5	-0.41	0
The Bank of Nanjing	1.58	-0.27	0
The Bank of Ningbo	0.92	-0.1	0

 

 

   According to the relevant regulations, bank loans may be extended once, therefore fell significantly in the second half of last year and the first half of this year economic growth, many loan has been through the extension of the way, avoid become non-performing loans. But in theThe second half of the year began, has been extended part of the loan once will surface in the form of bad loans.So the four quarter non-performing loans in the banking sector continued to "double down" has the certain difficulty.

 

   Comprehensive described above, this new bank loans increased, is the result of interaction of multiple factors. Mortgage loans to enterprises, risk less than that produced a lot of bad loans in 1990's.. And send them to the local financing platform loan may produce more in future non-performing loans.