By Esther Teo

CONCERN over China's bank lending policies and rock-bottom interest rates surfaced over a lunch hosted by Bank Julius Baer yesterday.

The Swiss private bank's chief investment officer, Dr V. Anantha-Nageswaran, said China's state-directed bank lending and extremely low interest rates were a cause of concern, given that the health of the global economy essentially boiled down to that of the United States and China,

'You never hear anything negative about China, a fact which worries me,' said Dr Anantha-Nageswaran, who added that state-directed bank lending and low interest rates have historically been a recipe for bad loans.

He cited the fact that asset management companies formed in 1999 to absorb bad loans from China's big four banks have managed to recover only 20 per cent.

The low returns have already prompted China's Finance Ministry to allow bond maturity dates to be extended in some cases instead of asking for repayment.

Dr Anantha-Nageswaran pointed out: 'If the Chinese (asset management companies) created to recover bad loans could recover only 20 per cent when the growth rate (of the economy) was 10 per cent, what happens in the next 10 years and what happens when the US growth remains uneven for the next three to five years? Where is the export growth going to come from?'

He also cautioned that the Chinese market was too optimistic and that the unwillingness to revalue the exchange rate raised the risk of inflation.

According to a Bloomberg report, China's banks extended 410.4 billion yuan (S$84.7 billion) worth of local currency loans in August, up from 355.9 billion yuan in July.

There seems to be no slowdown in the economic stimulus, with average monthly new loans in the first six months of this year standing at 1.016 billion yuan - 150 per cent more than the average figure of last year.

Bloomberg also reported that Chinese central bank officials have maintained that lending levels in the country are not a cause for concern as they are expected to stabilise and converge to a sustainable level.

At yesterday's lunch briefing, Julius Baer's head of portfolio management in Asia-Pacific, Mr Neo Teng Hwee, predicted that Asia's emerging markets will perform better than developed markets in the long term.

However, he said that due to rapid appreciation this year, Asian equities and debt markets may face a 'tactical correction' because of less attractive valuations.

Mr Neo added that Asia will need to develop its own domestic consumption in order to achieve a more sustainable growth path and that Asian investors should focus on domestic-driven economies and stocks.

This article was first published in The Straits Times.