Comments by China's two top banking officials playing down the risks of bad debt in the banking system provided the latest upbeat signal from Beijing suggesting seven straight quarters of slowing growth have ended. Markets will be looking for the remarks, from Central bank governor Zhou Xiaochuan and bank regulator Shang Fulin on Sunday on the sidelines of a congress to anoint a new leadership, to be backed up in coming days by solid lending data.
If so, that will close out a series of reports that have raised market expectations the worst is over for the world's second-biggest economy, although analysts say longer term China's new leadership will have to push reforms to ensure the country meets the goal outlined by outgoing President Hu Jintao to double 2010 GDP by 2020. "Right now, bank profitability is relatively strong and they have conditions to increase provisions for loan losses and write off some bad loans to prevent future risks," Shang, chairman of the China Banking Regulatory Commission, told a news conference.
Bank lending data has become China's most closely-watched economic statistic in recent months as investors try to judge the likely pace of new investment projects Beijing is approving to prop-up growth in what is the world's fastest expanding major economy even if it is on course for its slowest year since 1999. A pick up in growth from China would provide welcome news in the West, where industrialised economies are struggling following the debts built up during the global financial crisis. Japan on Monday said its economy shrank in the third quarter and the euro zone is widely seen as in recession.
The exposure of banks to high risk ventures, particularly in the property sector and outside regular lending channels in off-balance sheet "shadow banking" transactions, have gnawed at investors and worried ratings agencies. Shadow banking in the United States focused on property has been widely blamed for triggering the global financial crisis.
Zhou, head of the People's Bank of China (PBOC), said he had noticed that China's shadow banking risks had become a topic of discussion, particularly overseas, but played down the risks.
"The nature and scale of our shadow banking system is different from those in the western countries and the problem and scale of our banking system is much smaller than theirs," Zhou said. A report by Orient Asset Management Corp - one of four firms charged with cleaning up bad debts at China's banks - was cited by official media last week as saying bad debts could triple by the end of this year to 3 percent, but that would still leave them safely below international norms.
While Shang says the banking system does not face a systemic risk of bad debt, in comments on Thursday he identified loans to local government financing vehicles as an area of concern. "We are tightly controlling new loans and will ensure no new loans to the sector," he said on Thursday. Local government debt has been a dark cloud hanging over China's public finances since it was revealed that local authorities had racked up 10.7 trillion yuan ($1.7 trillion) of loans by the end of 2010.
The borrowing binge was triggered by the spending demands in Beijing's 4 trillion yuan ($640 billion) stimulus programme launched in 2008 at the depths of the global financial crisis. China is set to publish bank lending data for October in the week ahead, with economists polled by Reuters forecasting net new loans of 600 billion yuan ($96 billion).
Those numbers could provide another piece of evidence to reinforce growing views that China's economy is turning up. The head of the country's powerful planning agency said on Saturday this year's 7.5 percent growth target would be beaten. Statistics on Saturday showed China's trade surplus ballooned to its biggest in 45 months in October as export growth darted to a five-month high above 11 percent, surpassing expectations.
China's economy remains heavily levered to the external sector. Exports were worth about 31 percent of GDP in 2011, according to World Bank data, while an estimated 200 million Chinese jobs are supported by trade or foreign investment. Data on Friday meanwhile showed infrastructure investment accelerated and output from factories ran at its fastest in five months.
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