Bank of China’s profits surge – but does loan expansion suggest another bubble?

25th August 2011

Profits at the country's third-largest lender by assets hit a record 66.5 billion yuan (£6.2 billion) over the first six months of 2011.

This is a 28 per cent increase on the same period the year before and greater than those of HSBC, Europe's most profitable bank.

Loan expansion causes concern

Criticism is fierce in the case of Bank of China's profitability, because its pace of loan expansion, at 72 per cent between December 2008 and December 2010, was considerably swifter than those of rivals that came in with loan expansion rates below 50 per cent over the same period.

MarketWatch adds that the bank says its local governments are manageable, with more than 90% covered by cash flow, playing down concerns that they pose a default risk.

The bank, one of China's big four state-run lenders, was the largest credit issuer in a two-year lending binge to regional and city governments that took hold shortly before the global financial crisis hit.

Schroders' Head of Asian Equities, Robin Parbrook, asks:

China's local government loans – is this another bubble?

He says: "The numbers might look frightening, but China's local government debt problems can be managed if its leaders proactively address them and make genuine moves to rebalance the economy.

"The next five years will be crucial for China. However, it is hard to say for certain whether the country's leadership will take the bitter medicine that is necessary to move the economy from an investment-led to a consumption-led model. What we can say for certain is that the country must undertake a long and, maybe, painful process to deal with the issue of inflation and the extent of bad loans in the banking sector. Saying this, these issues can be managed over time if China proactively addresses them and genuinely moves to rebalance its economy.

"In summary, while the numbers may be bad, there is good news – China's starting government debt to GDP is quite low so, while the losses are large, the numbers should be manageable over time."

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