Foreign-Owned Banks Urged to Increase Lending

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Feb. 20 – The government is urging foreign-owned banks including Citigroup Inc. and HSBC Holdings Plc. to increase lending to support the slowing economy.

Last month, the likelihood of defaults led foreign-owned banks to decrease lending and rein in credit.China’s banking regulator in Shanghai announced yesterday that foreign-owned banks should increase their contribution to China’s economy and lend more to small firms. Shanghai alone accounts for 61 percent of overseas bank lending in the country.

The four top foreign lenders are HSBC, Standard Chartered Plc, Bank of East Asia Ltd. and Citigroup.  With Chinese banks first in line to lend to state-backed infrastructure projects, foreign rivals who chose to heed the call may have to shoulder more risk, analyst Yang Qingli told Bloomberg.

“Nobody can afford to stay on the sidelines anymore, even if it comes at the cost of lending to riskier companies,” said Yang, head of research at brokerage BOCOM International Ltd. “That’s what’s left for foreign banks now.”

Foreign banks have been there own set of troubles to contend with as a result of the global credit crisis. According to Bloomberg, HSBC may need as much as US$35 billion in fresh capital as more U.S. loans turn sour. Hong-Kong based, Bank of East Asia, recently posted its first loss in more than fourty years. Citigroup was  a recipient of a US$52 billion bailout and has already put its units in Japan up for sale.

Unlike local banks that provided RMB95 billion of new loans this month, foreign-owned banks decreased local-currency advances in Shanghai by RMB1.78 billion. This is in stark comparison during the same period last year when foreign banks increased lending to RMB12.3 billion.

Banks that do not follow China’s call to increase loans is doing so at their own peril, BOCOM’s Yang said. “You either follow or you lose business, meaning the government probably won’t approve any new branches or new products.”