Burying China’s bad loans

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The China Banking Regulatory Commission (CBRC) publishes the numbers for Chinese banking system.

Total banking assets rose to RMB128.5455 trillion by the end of Q3, up from RMB126.7831 trillion in the Q2, and increased by 19.67% from a year early according to CBRC. Total banking liabilities rose to RMB128.2893 trillion, up from RMB118.8470 trillion.

The all-important but unbelievable total non-performing loans rose from RMB 456.4 billion to RMB 478.8 billion, while NPL ratio rose from 0.94% to 0.95%.

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I have been quite sceptical about the true level of bad debts as opposed to the level of bad debts that are actually being recognised in the Chinese banking system. This is how such a system works, as a tightly controlled banking system should play an important role in stabilising the economy. I recently noted that the so-called “stimulus” to counter the current slowdown is being funded increasingly by non-bank sources, which is an entirely different discussion. But the key, to my mind, remains that if the government needs to keep credit growing, the best control the government has is to ask the tightly controlled banking system to lend, delay recognising bad loans either by pretending that they do not exist, or to roll over bad loans indefinitely.

Research from Bank of America Merrill Lynch, for instance, shows that even in the economic bubble of Japan which went bust in 1990, non-performing loans ratio did not go up significantly until 1994, and went further up later. Gillian Tett’s book Saving the Sun also told the story of just how hard it was for Japanese banks to actually deal with the problems of non-performing loans by recognising losses and cut off loans to failing companies because of political influences, among others.

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Chinese banks are now sitting on a tiny bit of non-performing loans which probably no one in their right mind should believe reflects the reality. WSJ reports that a recent survey done by China Orient Asset Corp, one of the asset management companies which was set up to deal with a bad loan problem in the previous century, suggesting that many participants in the survey (which are the key players involved in dealing with bad loans) think that the actual level of non-performing loans are higher:

The survey was conducted between June 15 and June 30 and was based on 210 completed survey forms, including 52 from banks, 50 from investors, 50 from the offices of asset management corporations around the country, and 58 from service providers like law firms.

According to the report, 65.39% of bankers said that the real level of nonperforming loans, or NPLs, is higher than the level reported on banks’ books. The survey said that no respondents thought NPLs were lower than their stated book value.

But how high it really is? Opinions differ:

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The banking regulator’s official figure puts nonperforming loans at only 1% of outstanding loans in the banking sector. When asked about the level of bad loans in their region, 57.69% of bankers put it at less than 3% (but presumably above 1%), 32.69% put it between 3% and 5%, and less than 10% put it between 5% and 10%.“Presently, China’s economic growth is slowing, and financial risk, especially the risk of nonperforming loans, are appearing,” said the report, which is dated October. “The credit risk from the steel, shipbuilding, and solar industries is relatively high, and the credit risk of export-oriented companies, local government financing vehicles and property developers can’t be ignored.”