China's bankers have one too many balls in the air

Chinese loan officers are finding themselves torn between conflicting policy goals. Beijing wants the country's commercial banks to help fund infrastructure spending to support cooling growth, but isn't relaxing a campaign to cut a $290 billion pile of bad debt. They also need to somehow remain profitable. First-half earnings show the pressure is pushing them headlong into consumer lending.

For lenders, especially those below the Big Four state-owned heavyweights, 2018 looks likely to get tougher. Chief finance enforcer Guo Shuqing is forcing them to recognise more non-performing loans while exiting lucrative shadow banking business lines. Smaller players are struggling, and consolidation is underway; some may even be allowed to go bankrupt.

A rumbling trade war with the United States has further complicated the outlook. Business confidence has showed signs of softening, and the pace of urban fixed-asset investment hit its weakest rate on record in July. Concerned officials are loosening fiscal purse strings and cutting bank reserve requirements to support infrastructure investment. Unfortunately there's a shortage of viable projects: China has been on a road-and-subway building binge since 2008. Similarly, thanks to overcapacity and price wars, many healthy private companies are wary of using debt to invest; those seeking to borrow are often rolling over bad loans.

    Fortunately Chinese consumers have pitched in. Joint-stock banks have cranked up mortgages and credit cards combined to nearly a third of total loans at the end of 2017, a UBS research note showed, up from 17 percent in 2013. Indeed, China Merchants Bank last week reported that nearly half of its loans were to retail borrowers in the first half, producing an annual yield of nearly 6 percent - two percentage points higher than company borrowers. Its peer Ping An Bank cranked up credit card loans by 27 percent in the same period, even as its corporate credit retreated 0.6 percent.

But while mortgages have been reasonably safe in China, consumer loans are less reliable. Assessing individual creditworthiness is relatively expensive, and credit card debt is unsecured. At the same time, consumer borrowing may start to cool too: car sales slowed in July, according to official data, and retail sales missed expectations. Still, lending to real people should help growth more than bridges to nowhere.