China Looks for Loan Boost - Wall Street Journal

By LINGLING WEI

BEIJINGâ€"China is expected to kick-start a trial program that would allow banks to turn loans into securities and free up funds for lending at a time when Beijing is seeking ways to bolster growth.

The securitization program could remove as much as 50 billion yuan ($7.9 billion) of loans from balance sheets, according to senior Chinese banking executives. Endorsed by China's banking regulators and the Ministry of Finance, it represents another step in China's efforts to revamp its financial system into one that relies more on market forces.

It also comes as Chinese authorities are stepping up efforts to fight a deepening economic slowdown amid the European debt crisis, which has hurt China's exports. This month, China cut interest rates for the first time since 2008 and loosened controls on banks' lending and deposit rates.

When economic growth slows, government leaders typically call on state-owned banks to make loans to rev up activity. But this time, there are concerns about banks' own funding constraints as well as a reluctance by businesses to take out loans when demand is uncertain.

By allowing banks to transfer a portion of loans off their books, the securitization initiative would help free up capital for the banks to lend more, banking executives said.

Chinese regulators have been wary about securitization, a process blamed for contributing to the global financial crisis after Western banks' packaging of risky home mortgages into securities led to losses for investors world-wide. Thus, the Chinese program is starting out cautiously, with a 50 billion yuan quota this year, or less than 1% of the banking sector's total loan balance.

China floated the idea of securitization about six years ago, only to put it on hold when the global financial markets went into a tailspin in 2008 following the collapse of Lehman Brothers Holdings Inc.

"Regulators are taking a very cautious approach to securitization," one of the senior banking executives said. "The emphasis is on beefing up lending to sectors that are in line with China's priorities."

Xinhua/Zuma Press

Chinese officials hope to kick-start lending for construction and other projects that could help drive growth.

Under the program, among the loans that banks would be able to remove from their books and repackage into investible products are those to infrastructure projects, small and medium-size companies, quality local-government financing vehicles and low-cost social-housing projects, the banking executives said.

China's Big Four banks, major policy banks and some medium-size lenders already have been gearing up for a share of the quotas, with the first securitization deal expected to hit the market in a month or two, the executives said.

Despite the cautious approach adopted by Chinese regulators, securitization boasts risks that could leave China's banking system with less of a buffer for loans that default. That is because any buyers of such repackaged products sold in China's still-underdeveloped capital markets are likely to be banks themselves.

"In China, risk transferring through securitization will be limited because the buyers of the securities will be mostly banks, and, therefore, most of the risks remain in the banking system," said Yvonne Zhang, a Beijing-based senior banking analyst at Moody's Investors Service.

In addition, Ms. Zhang said, "If banks, with the capital relief, go on to take on more risks in their new lending, it could also increase the risks for the banking system."

Meanwhile, as China moves toward letting the market determine banks' lending as well as deposit rates, regulators are considering allowing Chinese banks to tap certificates of deposits as a funding source, according to the banking executives.

Chinese banks including Bank of China Ltd. and Industrial & Commercial Bank of China Ltd. in the past year have been big sellers of such CDs in Hong Kong as a way to build up their yuan-deposit base offshore. But they aren't allowed to issue CDs on the mainland.

Should that restriction be lifted, "CDs could help banks attract deposits and provide savers with better rates and greater liquidity," said Zhu Chaoping, Shanghai-based head of research at ChinaScope Financial, a research firm and data provider.

Write to Lingling Wei at lingling.wei@wsj.com