BEIJING Chinese banks have extended 13 billion yuan in loans this year to finance domestic mergers, but the business will not surge because it is too risky, a senior Chinese banking regulator said on Tuesday.
Beijing started to allow banks to finance mergers and acquisitions at the end of 2008, albeit with lots of strings.
Big banks that met the regulatory criteria rushed into the market and, in addition to the funds provided for domestic M&A, had also lent $400 million for cross-border deals as of the end of May, Cai Esheng, a vice-chairman of the China Banking Regulatory Commission (CBRC), told a forum.
Applications to lend another 19 billion yuan for domestic mergers and $440 million for overseas acquisitions were in the pipeline, Cai said.
But he said: "As for such a risky business, banks, regulators and the entire mergers and acquisition market for that matter should not expect explosive growth."
Most of the loans to date had gone to sectors such as steel, power and coal where Beijing is pushing for consolidation.
In one typical case, China Construction Bank Corp (0939.HK) (601939.SS) and Bank of Communications (3328.HK) (601328.SS) helped Baosteel Group, the parent of Baoshan Iron and Steel Co Ltd (600019.SS), China's largest steelmaker, to finance its purchase of Ningbo Iron and Steel Co.
Cai said Chinese banks were generally following his agency's guidelines but were still weak in pricing and risk control.
"Improving risk management remains a key challenge for the healthy development of merger and acquisition loans in China," Cai said.
(Reporting by Zhou Xin and Alan Wheatley; Editing by Ken Wills)