COMMENTARY
Commentary:  China's Banks Try to Remain Healthy while Spurring Growth
April 30, 2009
Christopher Bjorke

After months in crisis mode, U.S. banks have stumbled along as zombies, submitted to stress tests and survived on infusions of TARP dollars and may finally be showing a glimmer of profit.

China's banks, on the other hand, appear to be relatively stable coming through the crisis.

• Industrial & Commercial Bank of China (ICBC), the country's largest, saw profits rise by 6 percent in the first quarter of 2009.
• Citic Bank this week announced 61 percent growth in net profit in 2008, exceeding its forecast of 60 percent.
• Spurred by government stimulus spending, banks made $670 billion worth of loans in the first quarter.
• Demand for Chinese bank securities remains strong, as indicated this week by the speedy sale of nearly 4 billion shares of ICBC stock.

The comparative health of China's banks reflects the fact that they avoided the mania for the toxic debt that Western banks were gobbling up just recently. However, they may be tempting trouble by overextending loans during a time of weak economic growth.

But ICBC Chairman Jiang Jianqing, in a recent McKinsey Quarterly interview, was confident that the banking system could help boost the economy while avoiding the bad loan trap they were in a decade ago.

"I believe we have the ability to seize the opportunity and spur economic growth while also controlling risks," Jiang said in the March interview. "The fact that China's finance industry has not been badly hit by the ongoing crisis should be attributed to great efforts and timely reform initiated by the Chinese government after the Asian financial crisis."

Staying balanced

Concerns about bad loans reflect the unusual nature of China's big, state-owned banks. Working to maintain growth rates in the face of global recession, Beijing is pumping billions of dollars into infrastructure projects and directing banks to keep credit flowing by expanding their lending.

Being state-owned, the banks have to do their part in keeping growth alive. But pushing money out the door during a time of weak demand can result in overinvestment in bad enterprises and undermine the financial sector's health.

This forces banks to walk a thin line between growth and financial responsibility. According to Jiang, China's banks have absorbed lessons from the 1997 crisis and will benefit from improved corporate governance and risk management.

But despite the danger of overextension, China's banks are enjoying stability and the confidence of investors. And that is not owing entirely to their merits.

"It's not because we are so good," Jiang said in March press conference. "It's because our competitors have done so badly."

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