Chinese bank’s bad loans take off

Advertisement

From Fortune:

China CITIC Bank, the bank owned by the country’s largest investment firm, said Thursday it would sell up to 11.9 billion yuan ($1.94 billion) in new shares in a private placement to China National Tobacco, maker of the country’s most popular cigarette brand. As such, that’s basically moving money from one state pocket to another.

…Bank of China announced last week it would raise $6.5 billion in international markets in the form of s0-called “contingent convertible” debt…Agricultural Bank of China, another of the country’s biggest lenders, is preparing to issue preferred shares.

…Industrial and Commercial Bank of China, the world’s biggest bank by assets, said late Wednesday its non-performing loans rose 9% in the third quarter, their biggest jump in at least eight years, according toBloomberg. Its net profit was still up 7.7% on the year, however, in line with forecasts.

Bank of Communications, the country’s fifth-largest bank, also reported its sharpest rise in NPLs in over two years, Reuters reported.

And from the WSJ comes the chart:

bad loans china

Advertisement

No real surprise here and it is a good news, bad news story. Of course bad debts will rise as China’s structural adjustment advances. As well as the souring parts of the economy throwing up more bankruptcies, nobody really believes bad loans are so low and the simple act of preparing the financial system for a more liberalised role, which is a part of the adjustment, will see them rise.

The bad news is that this is an indication for Australia that China will likely continue to slow and transform away from the fixed asset investment bubble that we’ve yoked our economy to. The good news is that the banks are already deploying the mechanisms that China possesses to prevent any “sudden stop” in credit flow as the bad loans mount. The examples above show that Chinese banks can access capital when private Western would not be able to in similar circumstances, given their public ownership and access to the government balance sheet.

My outlook remains unchanged. If house prices can do a “slow melt” then rising bad loans are a manageable part of a gradual slowing towards 5% growth over the next five years. If the property adjustment gets out of hand then although credit may not stop it will stall as the system chews through the bad loans and recapitalisation process, in which case a hard landing to 4% earlier is possible before a rebound.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.