China Tells

(Bloomberg) — China Construction Bank Corp. President Zhang Jianguo said the nation’s second-largest bank will cut new lending by about 70 percent in the second half to avert a surge in bad debt.

“We noticed that some loans didn’t go into the real economy,” Zhang, 54, said in an interview yesterday at the bank’s headquarters in Beijing. “I feel that some industries are expanding too rapidly. For example, housing prices are rising too fast, and housing sales are growing too fast.”

Construction Bank plans to extend about 200 billion yuan ($29 billion) of new loans in the second half, down from 708.5 billion yuan in the preceding six months, Zhang said. The company advanced 238 billion yuan in the year-earlier period.

Zhang’s comments add to evidence that Chinese banks may curtail credit after they advanced a record $1.1 trillion of new loans in the first half, almost equivalent to India’s gross domestic product last year. The benchmark Shanghai Composite Index has rallied 84 percent in 2009 and real estate and land prices have rebounded, fueling concern that loans meant for infrastructure projects are being used for speculation.

The People’s Bank of China said Aug. 5 it will use “dynamic fine-tuning’ and guide “appropriate” loan growth. The statement suggests the central bank will tighten monetary policy, said Galaxy Securities Co. chief economist Zuo Xiaolei. Construction Bank said last month it plans to follow government monetary policy.

Construction Bank slipped 2.7 percent at 10:08 a.m. in Hong Kong trading, paring its market value to $176 billion. It ranks third among banks in the world by that measure, behind Industrial & Commercial Bank of China Ltd. and HSBC Holdings Plc.

Overseas Acquisition

China spent about $650 billion cleaning up its banking system over the past decade after years of state-directed lending caused a pile-up of bad debts. Excess capacity in some industries and a property bubble has led to increased risks for banks, said Zhang.

“Our experience is, a period of time after rapid economic growth and rapid bank lending growth, problems will emerge gradually,” he said. “The risk is evident.”

While slowing loans at home, Zhang said he plans to expand abroad to close a gap with ICBC and Bank of China Ltd. Shares of Construction Bank have gained 36 percent in Hong Kong this year.

Construction Bank is in advanced talks about an acquisition in Asia outside mainland China, Zhang said. The deal has gotten regulatory approval and may close in the next two to three months, he said. Zhang declined to identify the target or give the size of the deal.

Cinda Purchase

The bank, with $186 billion of cash, hasn’t made any acquisitions abroad since August 2006. That’s when the Chinese lender bought Bank of America Corp.’s Hong Kong and Macau unit for $1.25 billion, gaining 17 outlets.

“Our disadvantage is that our overseas development isn’t adequate,” Zhang said. “We didn’t grasp enough acquisition opportunities in the past few years.”

Revenue from outside mainland China accounted for 1.7 percent of Construction Bank’s total in 2008. The bank has outlets in New York, London and a representative office in Sydney, and is seeking a banking license in Vietnam, Zhang said. Larger rival ICBC has spent more than $6 billion on acquisitions in Indonesia, Macau and South Africa in the past two years.

Construction Bank is also seeking to buy “close to” 50 percent of China Cinda Asset Management Corp., one of the four firms set up by the government in 1999 to clean up banks’ balance sheets after they racked up bad debts, said Zhang. The bank needs approval from the finance ministry and from regulators for the purchase, he said. Cinda is fully state owned.

Infrastructure Financier

Zhang expressed confidence in the dollar, saying it won’t be supplanted as the world’s reserve currency anytime soon. Chinese policy makers have said they favor an eventual shift in the global currency reserve system away from the dollar, suggesting wider use of an International Monetary Fund unit of account.

“For quite a few decades, the U.S. dollar is the best currency for international reserves, the currency to be used among us in the markets,” Zhang said.

Construction Bank is one of the main beneficiaries of demand for infrastructure loans induced by China’s 4 trillion yuan economic stimulus package. Established in 1954 to fund building of roads, bridges, dams and other infrastructure, it was the nation’s biggest mortgage lender until the first half of 2008, when ICBC pushed it to second place.

China’s total outstanding loans climbed 34 percent from a year earlier to 37.7 trillion yuan as of June 30. Credit growth will slow from that “unsustainable” pace to about 15 percent in 2010 as the strengthening economy reduces the need for loan support, Goldman Sachs Group Inc. said in a report last month.

Self-Discipline

Construction Bank grew loans by the least among China’s four largest lenders in the first half. Bank of China, the nation’s third-biggest, led expansion with 901.9 billion yuan of new advances.

Bank of China plans to continue expanding credit, yet may “fine tune” its lending strategy in line with any government policy changes, Beijing-based spokesman Wang Zhaowen said in an interview last week.

“Self-discipline is probably what Chinese banks need at this moment,” said May Yan, a Hong Kong-based analyst at Nomura International HK Ltd. “It will do them more good than harm in the long run.”