Increase in Chinese Bank Capital Requirements Likely to Further Reduce New Lending

Updating yesterday’s theme I was able to collect monthly new lending data from China.  The chart below shows the relationships between new lending in China and the BDI.  A recent decline of new lending in China is a likely factor behind the recent pullback in shipping rates and Chinese equity markets.  The decline in Chinese lending was not unexpected, as I highlighted in my piece on August 7^th from TheStreet.com, China Construction Bank announced that because of higher risk, it intends on reducing the amount of new loans in China by 70% during the second half of this year.  In addition on August 7^th the FT reported that, “China’s central bank has told the heads of the largest state-controlled banks to slow the pace of new lending, say people familiar with the matter, after new loan volume in the first half of the year tripled from same period a year earlier. “ To me this implies a significant increment in new Chinese lending is unlikely, and further downward pressure to Chinese asset prices is likely.

Additionally, it recently came to light that on August 19^th the China Banking Regulatory Commission sent plans to banks that would require banks tighter capital requirements.  Sheng Nan, an analyst at UOB Kayhian Investment Co, said on Bloomberg, “This move will cut one of the most important funding sources for banks,” and went on to say that bank, “have to either raise more equity capital or slow down lending and other capital consuming businesses to stay afloat.”  It is believed that banks would have until August 25^th to respond to the changes.

Source:  Bloomberg (August lending number is an estimate based on available information)