R 220903Z JAN 09
FM AMCONSUL SHANGHAI
TO SECSTATE WASHDC 7553
INFO AMEMBASSY BEIJING 
AMCONSUL CHENGDU 
DEPT OF LABOR WASHINGTON DC
DEPT OF TREASURY WASHINGTON DC
AMCONSUL GUANGZHOU 
AMCONSUL HONG KONG 
AMCONSUL SHANGHAI 
AMCONSUL SHENYANG 
AMEMBASSY SINGAPORE 
AIT TAIPEI 1493
USDOC WASHDC 0240
DEPT OF COMMERCE WASHINGTON DC

UNCLAS SHANGHAI 000044 
 
 
TREASURY FOR AMB HOLMER/WRIGHT/TSMITH 
TREASURY FOR OASIA/INA -- DOHNER/HAARSAGER/WINSHIP/CUSHMAN 
TREASURY FOR IMFP -- SOBEL/MOGHTADER 
USDOC FOR ITA DAS KASOFF, MELCHER, MAC/OCEA 
NSC FOR WILDER/LOI 
STATE PASS CEA FOR BLOCK 
STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/KATZ/MAIN 
STATE PASS CFTC FOR OIA/GORLICK 
 
E.O. 12958: N/A 
TAGS: CH ECON EFIN EINV PGOV
SUBJECT: (SBU) NANJING BANKERS NOTE SURGE IN GOVERNMENT PROJECT 
LOANS 
 
¶1.  (SBU) Summary.  Chinese domestic and Hong Kong commercial 
bank representatives in Nanjing confirmed that new lending for 
government-sponsored projects surged in December and January. 
Over the past year, said the officials, lending quotas 
established by China's central bank have made the greatest 
difference in loan issuance rates.  Provincial governments, 
however, set lending priorities;  both the Jiangsu Governor and 
the Jiangsu vice governor in charge of financial affairs 
pressured banks to fall in line at an October meeting. 
Nonetheless, some Nanjing banks are finding it difficult to 
fulfill instructions to lend to small and medium-size 
enterprises.  End summary. 
 
¶2.  (SBU) Congenoffs met on January 21, 2009, with Lin Fu, 
Chairman of the Board, Bank of Nanjing; Sheng Hong, Assistant 
Executive President, Nanjing Branch, China Everbright Bank; and 
Leo Lai, General Manager and Head of Business Development, 
Nanjing Branch, Standard Chartered Bank (please protect).  Bank 
of Nanjing has close relations with the municipal government, 
which is the bank's single largest shareholder (at 12.9 
percent); French bank BNP has 12.6 percent strategic stake. 
(Note:  Lin himself is the former deputy director of the Nanjing 
Municipal Finance Bureau, and he confirmed Bank of Nanjing 
continues to hold bureau-level status within the municipal 
government.  End note.)  The Everbright Nanjing Branch operates 
throughout Jiangsu Province, except for Suzhou (where there is a 
separate Everbright branch), and holds a 5 percent market share 
of banking activity in Nanjing; it has not yet been able to 
issue an IPO.  Standard Chartered has been in Nanjing for over 
15 years, and is the largest foreign bank in Nanjing; given the 
strong local competition, it focuses on interest rate swaps, 
currency exchange, and cash management for foreign firms. 
 
============================ 
Surge in Loans for Government Projects 
============================ 
 
¶3.  (SBU) The Nanjing bank representatives confirmed new lending 
for government-sponsored projects surged in December and 
January.  Everbright's Sheng told Congenoffs that his branch's 
new lending in the first twenty days of January alone equaled 
total lending in 2008.  (Note: Congenoffs later reconfirmed this 
statistic with Sheng's staff.  End note.)  Sheng explained that 
Everbright by October 2008 had many loans which had been fully 
vetted and approved, but People's Bank of China (PBOC) lending 
restrictions meant that projects were queued up by priority to 
receive funds.  Once the PBOC began encouraging lending in 
October, Everbright was able to release funds for multiple 
projects simultaneously.  Bank of Nanjing's Lin offered a 
similar picture, explaining that Bank of Nanjing took a few 
weeks to review its loan backlog in October and November, and 
then began a surge of credit issuance in December. 
 
¶4.  (SBU) Lin and Sheng agreed that it was the PBOC lending 
quotas that made the greatest difference in their loan issuance 
rates.  Sheng went as far to say that the PBOC's changes in the 
required reserve ratio for banks (the amount of deposits 
required to be kept in reserve and not loaned out) and base loan 
interest rates made no difference for his bank--"These matter 
only to our head office in Beijing," he noted.  Lin said PBOC 
loan quotas forced Bank of Nanjing to invest much of its RMB6.7 
billion (currently approximately US$1 billion) 2007 IPO proceeds 
in Chinese government bonds, leading to it being known as the 
"Bond Bank."  Bank of Nanjing currently has 40 percent of its 
assets in bonds, said Lin. 
 
¶5.  (SBU) Local governments set lending priorities, our contacts 
indicated.  Sheng said Everbright was focused on loans that 
support Jiangsu's urbanization, provincial industries, local 
small and medium-size enterprises (SMEs), and consumer credit. 
He emphasized Everbright's loans to provincial enterprises 
centered on enhancing their competitiveness in international 
markets rather than reorienting their production toward China's 
domestic consumers.  Sheng acknowledged the Central Government's 
effort to increase the economy's reliance on domestic demand, 
but argued such a transformation was too difficult in the short 
term.  For instance, Everbright, Nanjing, is the largest 
creditor of the Xugong Group, a manufacturer of heavy 
construction equipment based in Xuzhou, Jiangsu, and has 
extended several billion yuan in loans to Jiangsu shipbuilders. 
Sheng also revealed that much of the new lending in December and 
January has been channeled through local government investment 
corporations. Standard Chartered's Lai said he had heard that 
the Jiangsu authorities are guaranteeing the new loans, but he 
has not been able to confirm this. 
 
¶6.  (SBU) Bank of Nanjing's Lin gave expansion of local 
universities and highways as examples of  his bank's lending to 
locally supported projects.  One university wanted to speed up 
its three-year expansion project, said Lin, and therefore 
borrowed funds equivalent to the budget for the project's second 
and third years from the Bank of Nanjing; Lin said the loan risk 
is minimal, because the bank can be repaid from the university's 
allocations from the government over the coming two years. 
 
============================ 
Local Government and Regulators Push Lending in October 
============================ 
 
¶7.  (SBU) Everbright's Sheng offered further details on the 
Jiangsu Government's efforts to increase lending in the fourth 
quarter of 2008.  The Jiangsu Provincial Government's Financial 
Affairs Office (jinrong ban) called a meeting in October meeting 
that was attended by both Jiangsu Governor Liang Baohua and the 
vice governor in charge of financial affairs.  It was the first 
time in his twenty years in the banking industry to see top 
officials come together to focus on banking affairs in this way, 
said Sheng.  According to Sheng, Jiangsu will be compared 
against Zhejiang and Guangdong in terms of loan growth rates, 
and "None of the provinces wants to be last." 
 
¶8.  (SBU) The bank representatives suggested that Nanjing banks' 
response to local government guidance since October is out of 
line the trend that bankers are less susceptible to official 
interference.  Nevertheless, Everbright's Sheng said that 
although he attends all meetings called by local and provincial 
financial officials, he generally is easily able to deflect 
their requests by saying that the bank's head office in Beijing 
does not approve. 
 
============================ 
Continuing Caution on SME Lending 
============================ 
 
¶9.  (SBU) Everbright's Sheng said banks find it difficult to 
fulfill regulator's instructions for lending to SMEs.  (Note: 
SME lending is a priority under the Central Government's RMB4 
trillion fiscal stimulus package announced November 9.  End 
note.)  The China Bank Regulatory Commission requires banks to 
maintain credit growth for SMEs, said Sheng, but there are few 
opportunities where the return matches the risk.  As an example 
of SME lending Everbright can undertake, Sheng cited loans to 
Jiangsu car dealers for new car purchases where the vehicles are 
used as collateral.  If the dealer is not able to repay the 
loan, he said, under the terms of the loan the cars can be 
resold by the bank to the manufacturer. 
 
============================ 
Comment 
============================ 
 
¶10.  (SBU) Initial signs in Jiangsu Province are that banks and 
local governments have embraced the opportunity offered by the 
Chinese Central Government's RMB4 trillion fiscal stimulus 
package to ramp up investment in infrastructure and enterprises. 
 Less certain are the intentions of local governments to push 
China away from a focus on investment and exports and towards 
domestic consumption as a stronger economic driver. 
 
 
CAMP