The biggest questions to global economy is how China might deal with a vast pool of bad debts.
Theoretically, for banks to immediately recognize the losses embedded in bad loans and recovery for those losses by raising fresh capital is the cure – the cleaned-up banks are more likely to start lending again and thus play their role economy recovery. However, recognizing losses on bad loans can mean pushing corporate borrowers into bankruptcy. Such disturbance could interrupt China’s social stability.
16 Feb 2016
China bad loans highest in 10 years
Chinese commercial banks are lumbered with the highest soured loans in 10 years amid the slowest economic growth in a generation.
Non-performing loans climbed 51 percent to 1.27 trillion yuan (US$196 billion) in December from a year earlier, Bloomberg reports, citing the China Banking Regulatory Commission (CBRC).
The bad-loan ratio spiked to 1.67 percent from 1.25 percent while the industry’s bad-loan coverage ratio, a measure of its ability to absorb potential losses from soured credit, weakened to 181 percent from more than 200 percent a year earlier.
The lenders’ core Tier-1 capital ratio improved to 10.91 percent from 10.56 percent.
Concern over borrowers’ ability to repay debt has weighed on Chinese lenders, with shares of the country’s four largest banks trading at valuations at least 35 percent below a gauge of their emerging nation peers.
China’s economy grew 6.9 percent last year, the slowest pace since 1990.
The CBRC data comes amid speculation soured loans could be much larger than indicated by official data.
Kyle Bass, a hedge fund manager who successfully bet against mortgages during the subprime crisis, said earlier this month that the Chinese banking system may see losses of more than four times those suffered by US lenders during the last crisis.
That claim has been disputed by analysts at China International Capital Corp. and Macquarie Securities Ltd.
Should the Chinese banking system lose 10 percent of its assets because of non-performing loans, the nation’s banks will see about US$3.5 trillion in their equity vanish, Bass, founder of Dallas-based Hayman Capital Management, wrote this month in a letter to investors obtained by Bloomberg.
Larry Hu, a China economist at Macquarie in Hong Kong, said in a research note on Monday that Bass’s estimate could be too large as it implied a true bad-loan ratio for China banks at 28 to 30 percent.
Shang Fulin, chairman of the banking regulator, told an internal meeting last month that banks would be forced to restructure, inject new capital or change their senior management if key risk indicators, such as bad-loan coverage and capital adequacy ratios, fall outside “reasonable ranges,” according to people familiar with the situation.