Bank of China’s Zhu Sees ‘Bubbles’ in Asset Markets (Update2)

By Bloomberg News

Sept. 10 (Bloomberg) -- Bank of China Ltd., which led the nation’s $1.1 trillion lending spree in the first half, said ample liquidity has caused “bubbles” in stocks, commodities and real estate.

“The potential risk is that a lot of liquidity goes to the asset market,” Vice President Zhu Min said in an interview in Dalian today. “So you see asset bubbles in commodities, stocks and real estate, not only in China, but everywhere.”

China’s record credit expansion, which helped the country’s economy expand 7.9 percent in the second quarter, has raised concerns that bank loans have been diverted and used to buy stocks and real estate, fueling unsustainable gains in equity and property markets.

The Shanghai Stock Exchange Composite Index has gained 61 percent this year, compared with a 20 percent increase in the MSCI World Index of 1,659 companies. House prices China’s 70 biggest cities rose at the fastest pace in 11 months on record lending and climbing confidence, according to a National Bureau of Statistics report today.

Bank of China advanced 1 trillion yuan of new loans in the first six months, more than any other Chinese lender and the gross domestic product of New Zealand. The Beijing-based bank, the nation’s third-largest, said last month it plans to slow credit growth in the rest of the year and improve loan quality.

Higher Capital Requirements

China Construction Bank Corp., the nation’s second-largest, said last month it will cut new lending by 70 percent in the second half from six months earlier to avoid a surge in bad debt. Chairman Guo Shuqing said excess cash in the banking system has led to asset bubbles.

An estimated 1.16 trillion yuan ($170 billion) of loans were invested in stocks in the first five months of this year, China Business news reported June 29, citing Wei Jianing, a deputy director at the Development and Research Center under the State Council.

The China Banking Regulatory Commission said on Sept. 3 it will implement stricter capital requirements for banks. Lenders were also required to raise reserves to 150 percent of their non-performing loans by the end of this year, up from 134.8 percent at the end of June.

The Shanghai Composite Index fell into so-called bear market last month on concern slowing lending growth and tighter capital requirements would derail a recovery in the world’s third-biggest economy. The gauge has bounced back this month, rising 9 percent.

New loans in July were less than a quarter of June’s level. August new-lending figures are scheduled to be released on Sept. 11 and may show a 10 percent decline to 320 billion yuan, according to the median estimate of nine analysts surveyed by Bloomberg.

Loans surged in the first six months of this year after the central bank scrapped quotas limiting lending in November to support the government’s 4 trillion yuan stimulus package and key industries including petrochemicals, steel and automakers.

Zhang Xiaoqiang, vice chairman of National Development and Reform Commission, China’s top economic planning agency, said he sees “little bubbles” in the nation’s new energy sector and is looking into measure to curb excesses at an early stage to allow for healthy development for the industry.

For Related News and Information: Top financial stories: FTOP <GO> Stories on China Banks: TNI CHINA BNK <GO> China’s monthly new loans: CNLNNEW <Index> HP <GO> Relative value comparison: 3968 <Equity> RVC <GO>

Last Updated: September 10, 2009 03:49 EDT