Bank of China’s Chief Xiao Gang notes that government directives are not solely responsible for China’s lending boom:
“Profit is the main driving force of banks. Listed banks have shareholders and must pay attention to market value. Money must be made each quarter and each year to improve certain key performance indices, such as return on equity and return on assets. Like listed banks anywhere in the world, these banks must catch the eyes of new investors, and increase returns to existing ones.
In China, because of the non-liberalized interest rate, net interest margins on yuan loans are almost double of that on foreign currency loans in the international market. In such an environment, which bank wouldn’t want to increase its lending? The more banks lend, the more profits they earn. Simple.”
http://www.boc.cn/en/bocinfo/bi1/201008/t20100826_1126757.html
In China, because of the non-liberalized interest rate, net interest margins on yuan loans are almost double of that on foreign currency loans in the international market. In such an environment, which bank wouldn’t want to increase its lending? The more banks lend, the more profits they earn. Simple.”
http://www.boc.cn/en/bocinfo/bi1/201008/t20100826_1126757.html
In a financially repressed environment, where banks don’t have the freedom to set their own interest rates and savers have few options but to invest domestically, the behavior of Chinese state owned banks is not all that surprising.
It is always about incentives.
Source: PBOC via BIS