With the world’s second largest economy bidding farewell to its decades of roaring double-digit growth, it is only natural that Chinese banks will find it increasingly difficult to make big profits just by lending more.

Chinese policymakers should keep a close eye on the possible effects of sluggish loan growth on both commercial lenders and the national economy.

And, rather than rushing to turn on the liquidity tap, policymakers should urge domestic banks to face up to this test and adapt themselves to the ongoing transformation of the country’s growth pattern.

ICBC bank china
Chinese banks will find it increasingly difficult to make big profits just by lending more

Latest figures from the People’s Bank of China show the country’s new yuan-denominated loans totaled 681.8 billion yuan ($108.2 billion) in April, down 61.2 billion yuan compared with a year earlier.

Such a surprising drop in new loans has understandably sparked worries among international investors that China’s economic slowdown might be more serious than expected.

With the fragile global recovery still deeply uncertain due to the ongoing eurozone crisis and growing US political paralysis, the latest sign of cooling in China, a key growth engine for the world economy, does make a case for more caution.

In response to the economic deceleration, China’s central bank cut the reserve requirement ratio for banks last Saturday, the third such reduction in six months.

Clearly, Chinese policymakers have recognized the urgency of fine-tuning monetary policy to accommodate slower economic growth, a price that the country has to pay while shifting the economy away from excessive reliance on exports and investment toward domestic consumption.

But Chinese banks have found that the shrinking appetite for loans has not only threatened their profit margins but also raised questions about the quality of their assets.

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Testing times for banks

The market-oriented reforms China has implemented over the past two decades have unleashed individual initiative and entrepreneurship, whilst retaining state domination of the economy.

China now ranks as the fifth largest global investor in outbound direct investment (ODI) with a total volume of $56.5 billion, compared to a ranking of 12th in 2008, the Ministry of Commerce said on Sunday. China is expected to have 200 million cars on the road by 2020, increasing pressure on energy security and the environment, government officials

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