Rapid loan growth puts Chinese banks at risk

Loan growth among Chinese banks hit more than Rmb7.76 trillion $1.13 trillion in the first half of 2009, a record high. As a result, asset quality is likely to slip further in 2009, but should remain highly manageable. It could deteriorate sharply in the next two to three years, however, if the economic slowdown is protracted in China.

Chinese banks seem to be lending so aggressively despite the economic slowdown for three key reasons. First, the strong growth suggests that the banks' corporate governance is still relatively weak and that the government continues to exert strong influence over banking practices as a dominant shareholder. Second, the banks appear willing to extend additional funding to borrowers...