Cablegate: Bank Lending Revives Growth in East China's Zhejiang

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R 261104Z FEB 10
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 8572
INFO RUEHBJ/AMEMBASSY BEIJING 3327
RUEHCN/AMCONSUL CHENGDU 2412
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
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RUEHUL/AMEMBASSY SEOUL 0695
RUEHSH/AMCONSUL SHENYANG 2403
RUEHIN/AIT TAIPEI 2202
RUEHKO/AMEMBASSY TOKYO 0906
RUEHGH/AMCONSUL SHANGHAI 9239

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E.O. 12958: N/A
TAGS: ECON EFIN EINV PGOV CH
SUBJECT: BANK LENDING REVIVES GROWTH IN EAST CHINA'S ZHEJIANG

REF: SHANGHAI 041

1. (SBU) Summary: Despite the downturn in traditional export
markets, East China's Zhejiang Province kept pace with average
Chinese lending growth last year, helping to boost GDP growth by
year end. Zhejiang has issued support plans for eleven
industries, but is attempting to focus new financing on small-
and medium-size enterprises (SMEs) -- the traditional industrial
base of this entrepreneurial province. Zhejiang's financial
regulators greatest concerns lie with combating inflation
expectations in the wake of this lending boom. End Summary.

============================================
Government Jumpstarted Growth in 2009 . . .

============================================

2. (SBU) The Central Government's relaxed monetary policy and
fiscal stimulus played the major role in Zhejiang's economic
growth of 8.7 percent in 2009, according to Hangzhou-based
banking regulators and bankers who spoke with EconOff on January
21. Li Hong, deputy president of the Hangzhou Sub-branch of the
People's Bank of China (PBOC), said new lending in Zhejiang last
year was over RMB900 billion (approximately US$132 billion),
amounting to about one-tenth of total new lending in China
during the period. (Note: One-tenth is in line with the
historical ratio of total loans in Zhejiang to total loans in
China, according to PBOC data. End note.) Tian Dazhang, Deputy
Head of the Zhejiang Regional Headquarters of the Industrial and
Commercial Branch of China (ICBC), confirmed his bank lent out
an "enormous amount" -- RMB70 billion (approximately US$10
billion) in 2010 -- although he noted ICBC was third in new
lending in 2009 behind Bank of China, which took top place with
RMB97 billion (approximately US$14 billion), and the China
Construction Bank.

3. (SBU) In terms of fiscal stimulus, PBOC's Li noted Zhejiang
issued support plans for eleven industries, one more than the
number of industries specified for national support by the
Central Government in connection with the 2008 stimulus package.
Zhejiang included construction and transportation, but not the
logistics sector, which was in the Central Government's plan.
(Note: The nine other industries enjoying support from both the
Central Government and Zhejiang are iron and steel, automobiles,
shipbuilding, petrochemicals, light industry, textiles,
nonferrous metals, equipment manufacturing, and electronics and
information industries. End note.) Li said 16 to 17 percent of
new lending in the province went into stimulus projects,
acknowledging this was a low percentage compared with other
provinces because of the predominance of Zhejiang's private
sector. ICBC's Tian said his bank has a share in lending to all
government stimulus projects.

4. (SBU) The traditionally low share of the government sector
in Zhejiang's economy placed some limits on the number of
official stimulus projects that could be rolled out on short
notice, said PBOC's Li. (Note: According to Zhejiang
officials, 99.9 percent of Zhejiang enterprises are SMEs, most
of which are privately owned. End note.) Zhejiang provincial
officials did not have as many infrastructure projects lined up,
because, for example, the highway system is already relatively
complete, and there are few large state-owned enterprises. (See
reftel.) ICBC's Tian said his bank's headquarters required that
infrastructure loans be tied to future returns, such as user

SHANGHAI 00000059 002 OF 005

fees or land sales, so ICBC will not lend for "pure" public
works projects, such as parks.

============================================= =
. . . Pulling Enterprises Back from the Abyss

============================================= =

5. (SBU) Contacts pointed to the winter of 2008-09 as the low
point for Zhejiang's economy during the current crisis. Yang
Xiaoping, director-general of the Zhejiang Office of the China
Banking Regulatory Commission (CBRC), said in 2009 growth was
slowest in the first quarter, and thereafter picked up quarter
by quarter. According to the National Bureau of Statistics,
first quarter 2009 economic growth in Zhejiang was 3.4 percent
compared with the same period the previous year, while national
growth for the same period was 6.2 percent; for the first half
of 2009 Zhejiang grew 6.3 percent, compared to 7.1 percent
nationally; for the first three quarters, both figures were 7.7
percent; and for the full year, both figures were 8.7 percent.

6. (SBU) ICBC's Tian said the fourth quarter of 2008 was the
worst time for Zhejiang's SMEs, and SME bankruptcies were
clearly reflected in ICBC's books. However, Tian said following
the 2009 Lunar New Year holiday 70-80 percent of Zhejiang
companies had recommenced production -- ICBC confirmed this by
visiting clients to determine if, among other indicators, they
could hear machinery running in the factories. (Note: Lunar New
Year 2009 began on January 26. End note.)

=====================================
Automobiles a Focus in Zhejiang, Too

=====================================

7. (SBU) The nationwide boom in car sales was cited as a
specific factor driving Zhejiang's growth in 2009. CBRC's Yang
said stimulus policies helped to promote domestic consumption of
cars and home appliances. Yang pointed to the Wanxiang Group as
an example of companies benefitting from the stimulus, with
sales and profits each up 60 percent for the year 2009, while
revenues have increased monthly since March of last year.
(Note: Wanxiang is a Zhejiang-based conglomerate that has major
business lines in auto parts, agricultural goods and farm
equipment, and real estate. End note.) China Development
Bank's marketing of consumer automobile loans was cited by
PBOC's Li as an example of financial innovation driving economic
growth in the province. The value of Zhejiang's car sales rose
30 percent in 2009, according to the Zhejiang Bureau of
Statistics, in line with the National Bureau of Statistics
figures of 32 percent growth for all China.

=========================================
Tailored Help for Local Businesses . . .

SHANGHAI 00000059 003 OF 005

=========================================

8. (SBU) The Zhejiang government reached out to aid local
businesses during the global financial crisis. Chen Zhou,
deputy director of the Foreign Capital Utilization Section of
the Zhejiang Development and Reform Commission, said provincial
leaders organized teams from various provincial departments to
establish temporary offices in towns around the province to help
firms cut through red tape -- for example, in registering
businesses with the State Administration of Industry and
Commerce. Yang said the CBRC asked banks to "help firms get out
of trouble," while at the same time pushing undesirable firms --
such as heavy polluters -- out of the market.

9. (SBU) Zhejiang has special conditions that call for policies
different from those of the Central Government, our contacts
said. For instance, PBOC's Li said the Central Government is
concerned about overcapacity in textiles, but Zhejiang's
approach is different. Since textiles is a pillar industry in
Zhejiang, the province has decided it would be better to help
textile manufacturers become more competitive and profitable,
rather than pushing them out of business, said Li. Li also
cited the support China Construction Bank in Zhejiang is giving
to the local shipbuilding industry.

=====================
. . . Including SMEs

=====================

10. (SBU) Given the predominance of Zhejiang's private sector,
the provincial authorities are promoting new channels for SME
finance. The Zhejiang CBRC -- in line with national CBRC
guidelines -- ordered all banks to establish dedicated
departments for SMEs. CBRC's Yang said these departments are
required to be separated from other operations by having special
performance ratings for SMEs, special pricing of SME financial
products, and personnel dedicated to SME-related operations. In
2009, 85 percent of new lending province-wide went to SMEs, said
PBOC's Li. (Note: According separate PBOC statistics, just
over 58 percent of new lending to corporations nationwide went
to SMEs in 2009. End note.)

11. (SBU) ICBC is exemplary in efforts to finance SMEs, said
CBRC's Yang, and by year end 2009 has established 100
subbranches in Zhejiang Province for SME business. However,
ICBC's Tian detailed the difficulties China's biggest commercial
banks face in serving SME clients. He noted 70 percent of ICBC
Zhejiang Branch loans went to SMEs in 2009 -- below the
provincial average cited by the PBOC -- which would be further
reduced to 50 percent if ICBC Zhejiang lending through the
headquarters asset pool is included. ICBC is having some
success putting SME financial services online, for the
convenience of clients, but nonetheless faces high SME client
turnover -- 30 percent of SME clients go out of business each
year -- and the vetting of new SME clients must be done in
person.

SHANGHAI 00000059 004 OF 005

============================================= =
High January Bank Lending Not Worrisome . . .

============================================= =

12. (SBU) Contacts downplayed the possibility of a Central
Government crackdown on bank lending in the wake of a large
volume of new lending in early January. PBOC's Li said new
lending in January was not a good indicator of trends in 2010,
since there is always a rush to lend at the beginning of the
year -- this then locks in a full twelve months of interest
payments -- and that in addition, there was pent up demand from
the low lending at the end of 2009. ICBC's Tian also suggested
the January surge was a one-off, saying many of the loans issued
in January were for projects prepared in the fourth quarter last
year.

13. (SBU) Our contacts also denied the PBOC had moved in late
January to penalize overly fast lending. Chinese media widely
reported some banks were being required to set aside reserves,
an administrative move the PBOC can use to restrict the bank
lending base. CBRC's Yang said she knew of no Zhejiang-based
banks being penalized in this manner, and ICBC's Tian also
asserted his bank was not facing these restrictions. Yang noted
that regulators may have to wait for the end of the month, as
banks are not required to report mid-month statistics. (Note:
Subsequently on February 11 the PBOC announced new lending in
January soared to RMB1.39 trillion -- from RMB380 billion the
previous month -- and on February 12 raised required reserve
ratios (RRRs) by an additional half percentage point, a move
that many analysts say signals a PBOC bias toward a somewhat
tighter monetary policy. End note.)

======================================
. . . But NPLs and Other Risks Rising

======================================

14. (SBU) Regulators in Zhejiang are increasing oversight of
new lending to reduce the potential for future problem loans and
inflation. According to PBOC's Li, the overall balance of
nonperforming loans (NPLs) increased by RMB4.5 billion in
Zhejiang Province last year, although the ratio of NPLs dropped
by 0.26 percentage points because the overall amount of lending
increased. (See reftel.) Local governments have also increased
funding to bail out firms that get into trouble, said Li.
While Li acknowledged that momentum in lending will stay high,
in order to service projects begun last year, the PBOC is
requiring that 80 percent of lending by large banks -- and 70
percent of lending by smaller banks -- go to existing projects;
new projects will have to be "carefully evaluated." CBRC's Yang
said that by January 23 banks needed to submit a draft oversight
system for ensuring that loans do not flow into speculation in
the real estate and stock markets. Currently, Zhejiang banks
have attained a 180 percent coverage ratio for NPLs, said Yang.

SHANGHAI 00000059 005 OF 005

15. (SBU) One problem with combating inflation expectations,
said Li, is that "it is very difficult to forecast." The
consumer price index (CPI), he observed, does not actually
reflect what consumers are experiencing with respect to
increases in their cost of living, because the CPI components
are not weighted correctly. Compounding the problem from Li's
perspective, inflation is increasingly based on international
factors, such as commodity prices. CBRC's Yang said the Central
Government may put controls on some prices to stave off
inflation, but that currently the government's main job is
controlling inflationary expectations. The PBOC RRR increase
was a signal to the market that it is serious about this task,
said Li.

=======
Comment
=======

16. (SBU) Zhejiang's financial regulators appear well aware of
the potential danger of increasing nonperforming loans following
2009's lending boom but, as of early 2010, also have little
incentive to apply the brakes too hard on local enterprises --
best exemplified by their "wait and see" attitude on stanching
new loan growth. An additional danger is that Zhejiang
authorities will be tempted to support the growth of larger
enterprises, or even encourage the formation of new state-owned
conglomerates, in order to better tap Central
Government-approved financing. Hints of that approach can be
seen in the enhanced delivery of government services to local
businesses during the financial crisis, but more worrisomely in
the case of the potential benefits channeled to a local
autoparts manufacturer. Nonetheless, Zhejiang continues to be
an exemplar of private entrepreneurship, and buoyed by its late
2009 recovery, will most likely remain largely on that path.
BEEDE

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