One Bank and Three Commissions: Encourage Green Credit and Curb

Overcapacity

At the end of 2009, the People’s Bank of China, the China Banking Regulatory Commission, the China Securities Regulatory Commission and the China Insurance Regulatory Commission issued the Guiding Opinions on Providing Further Support for the Restructuring and Revitalization of Key Industries and the Curbing of Overcapacity in certain Industries through Financial Services (hereinafter referred to the “Opinions”). The document specified that “different approaches should be taken in the provision of credit so as to encourage the growth of certain sectors while discouraging the expansion of others”, wherein, financial institutions are required to “make serious checks on credit”. The document also highlighted the financing function of the capital market and the promotion of businesses mergers and restructuring to support the strategy of “going global”.
On the same day, the People’s Bank of China also published the contents of the fourth quarter regular meeting of the Monetary Policy Committee. The meeting highlighted the need to control the speed of credit growth and encourage balanced credit extension so as to avoid large fluctuations on the basis of the moderately lax monetary policy in the coming year.
Curb overcapacity and encourage “green credit”
The “One Bank and Three Commissions” required that loans to surplus industries should be strictly controlled whilst greater emphasis should be placed on “green credit” and the provision of support to key industries.
The Opinions expressly requires ensuring timely and efficient provision of funds to businesses and projects that comply with the requirements on restructuring and revitalization of key industries, the conditions of market entry and the principles of bank credit. No credit extension shall be supported to those projects that fail to comply with industry policies, market entry conditions, technical standards and that are in shortage of capital. Loans to projects in surplus industries shall be strictly inspected and reviewed prior to approval.
The document also forbids the unchecked granting of loans to businesses and projects in industries that have been defined as the government as having a serious surplus. Banking and financial institutions shall not provide any form of credit to those projects that fail to comply with the requirements on restructuring and revitalization of key industries and the requirements of the related industrial policies, and fail to be reviewed or approved as per specified procedures, and especially those projects that are expressly ordered to close due to backward capacity, that are illegally or improperly reviewed and approved, that are built without prior approval or that are being built while applying for approval.
“The adjustment the economic structure cannot be delayed.” Wu Nianlu, a professor at the Graduate Department of the People’s Bank of China pointed out that overcapacity exists in the iron, cement and electrolytic aluminum industries.
The Opinions also calls for the further strengthening of financial support for energy-saving, emission-reducing and environmental protection projects so as to support the development of a low-carbon economy. Banking and financial institutions are encouraged to develop a variety of innovative low-carbon financial products. According to the principle of “green credit”, more support should be provided to businesses and projects that comply with national requirements on energy saving, emissions reduction and environmental protection.
At the China Financial Forum (2009), Vice President of the China Construction Bank (CCB) Hu Zheyi expressed that supporting the low-carbon economy is not just an obligation of banks, but also a means for them to make profit. “the renovation of a large number of traditional industries and the growth of a number of new industries during the transition towards a low-carbon economy will present a large demand for ‘green credit’; banks can provide new services and products such as consultation, financing products, low-carbon project finance, and may directly participate in the carbon market.”
We noticed that the Opinions also calls for the speeding up of innovation in regard to the financing products and service modes for certain industries. For example, for key industries like light industry, textile industry and equipment manufacture, banks may explore financing modes involving the pledge of confirmed goods value; growing small and medium electronic information enterprises may be financed by the pledging of intellectual property rights; the automobile consumption credit system and processes should be improved.
Strict control on credit to support “going out”
Risk prevention and control is also the focuses of the “One Bank and Three Commissions” for the next year.
The Opinions requires the strengthening of systems and mechanisms for credit risk prevention and control, the strengthening of monitoring, warning and prevention of risks in the movements of credit funds in local financing platforms, and the enhancement of capacities in risk evaluation and control over all loans, especially medium and long-term loans and government loans.
In light of this, Wu Yonggang, Banking Analyst at Guotai Junan Securities, holds that the largest risk in bank credit is project confirmation. Since some projects have low returns and involve large risks, lending to them might result in NPLs in the future. In addition, efficiency in the use of credit funds is also worthy of attention. A large amount of loans were granted this year, so fake loans and misused loans cannot be ruled out.
Wu Niannu holds that risks also come from guarantees made by local governments. Local governments should not and cannot become guarantors. Banks have granted a large amount of loans because of government guarantees, but once a project experiences problems, the credit risks will be shifted to the bank, resulting in a nonperforming loan.
As for enterprise merger and restructuring and the “going out” strategy of key industries, the “One Bank and Three Commissions” expressed that they would provide support from financial services, the capital market and in terms of foreign exchange management by strengthening and improving the financial services for international mergers and for domestic enterprises to develop international markets, supporting the merger and restructuring of capable enterprises by making use of the capital market, and expanding trials on RMB settlement in international trade.
The Opinions also requires a multi-level and diverse direct financing system and the provision of support for automobile financing enterprises in issuing financial bonds; channel private capital, including private placement equity funds and risk investments, into the restructuring and revitalization of key industries; make full use of the risk guarantee function of insurance, and stably develop consumer credit insurance covering housing and automobiles. (Source: Daily Economic News)

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