Bank lending in China has hit a record-setting 5.2 trillion yuan in the first fourth months of 2009. But what are its consequences? What are the risks involved in this lending surge? Is it inevitable for bad loans to emerge in the future? Do Chinese banks also have the same weaknesses that were shown by major global banks during the financial crisis? In an exclusive interview with China Daily reporter Yang Zhen, Mark Lawrence, managing director of Mark Lawrence Group and senior advisor at McKinsey & Company, gave the following answers:

Q: Based on your experience in risk management, is it normal for banks to go on a lending spree when the economy is slowing down?

A: In economic downturns, banks will face borrowers that are in trouble and will slowdown their lending to troubled companies. This is sound and prudent risk management practice. Banks around the world have been doing this. It is the most sensible way to manage risks.

But, what is happening here in China is quite the opposite. One way to think about this is that we're seeing an unprecedented experiment.

Q:Do you think the experiment will succeed?

A: If the Chinese government can help the economy recover by boosting bank lending, it means the experiment has succeeded. Although it's too early to declare victory, early signs have shown some improvement.

Some in the US probably wish they can make banks start lending again. But, if one bank starts lending and others don't, that bank lending will perish. The fact that all banks in China are lending may have a happy ending.

Q: Is this a good experiment?

A: Let's have this conversation in two years and we'll know the answer.

Q: In a system where the government has a strong influence on banks' lending activities, do you think the lending surge in the first quarter in Chinese banks will cause bad loans to emerge in the long run?

A: I love this question and I'm not sure if 10 years ago we could have discussed this.

The government's strategy may work for the economy as a whole, but individual borrowers may still be under great stress. China's economy may return to a very high level of growth rate, but individual borrowers will default. Loan losses in banks may be quite high as a result of this unique strategy.

Q: If that happens, many Chinese will probably still think it worthwhile. Will this strategy work?

A: It has never been tried on this scale in the history of banking.

Q: Many people in China argue that the new loans extended by banks were low-risk, as most loans went to government-supported infrastructure projects. Do you agree with it?

A: The risk of infrastructure projects is very complicated. Let's take building a toll way as an example. The revenue projections of a toll way are basically based on how many cars would actually drive by the road. As long as people keep driving on the road, the risk is alright. But once the gas price has gone through the roof such as it did in the US, people will drive less and switch to public transport. If that happens, the revenue can't cover the cost of the bond and the toll way will go bankrupt. This has happened in Australia before. They got the projections wrong.

Q: The robustness of an infrastructure project's finances depends on projections. How good are most projections?

A: You won't know until the project is completed and put into use.

Q: You mentioned the risk management lessons learned in the global financial crisis. Are those lessons adaptable to Chinese banks?

A: I think the inability to get an integrated view on risks and insufficient risk management skills are definitely weaknesses in Chinese banks too.

It's more difficult for Chinese banks to get an integrated view on risks than the big US banks because they have had modern risk management process in place for several decades. Those banks' risk management team has been redesigning their risk management reports from the mistakes they have made.

A good risk report should give the bank's decision-makers various options based on different scenarios analyzed in the report. The ingredients in the report should be able to help open a dialogue between the bank's risk manager and its decision-makers. This is what I describe as an intelligent risk management process.

If a bank wants to produce a good risk management report, it has to start with data that is timely, accurate and complete. That's a huge challenge for banks such as Industrial and Commercial Bank of China. It's a bigger challenge to produce a good report that is easy to understand, for senior officials in Chinese banks who aren't career bankers.

China still has only a handful of experienced risk managers, although there're people who have been doing risk management for over a decade.

I've spent quite some time working with Chinese banks. What I really love about China is that almost everyone here is really smart, which means people learn really fast. But they're still learning and there's quite a bit to learn.

And if you look at the stature of a chief risk officer in a Chinese bank, it doesn't carry strong enough influence on the bank's decision-making.

(China Daily 05/25/2009 page4)