China needs to be upfront about its bad debts | 2019-03-20 |

China needs to be upfront about its bad debts

20 March, 2019 12:00 AM printer

Beijing: China's banks may have a flood of bad loans waiting in the wings. Not that you'd know it from looking at official levels for 2018, which suggest the problem was broadly contained. The reality is that newly-soured debt was coming through the front door as fast as banks could shovel it out the back.

The authorities worked hard to restrain financial-system leverage in 2018. Outstanding credit increased a relatively modest 10 per cent, with growth in new loans falling 14 per cent. The government accomplished this primarily by tightening restrictions on shadow banking and moving that lending into the formal banking system, which recorded a 13 per cent jump in new loans last year, report agencies.

To make way for that increase, and with new deposits falling 1 per cent last year, banks sold a lot of non-performing debt to asset management companies, or AMCs. Sales to AMCs and other disposals totalled almost 1.8 trillion yuan (S$362.6 billion), said a report by Jason Bedford, executive director of Asian financials research at UBS Group AG in Hong Kong.

To put that in perspective, China began the year with 1.7 trillion yuan in bad loans and ended it with 2 trillion yuan. In other words, after selling roughly their entire declared stock of soured advances, lenders still closed the year with more than they started with.

This has a couple of implications. First, banks are having to dedicate more earnings to loan-loss provisions. In the first half of 2018, Industrial & Commercial Bank of China (ICBC) Ltd allocated 43 per cent of pre-provision profit to boosting capital reserves. At Agricultural Bank of China Ltd, impairment losses were equal to 56 per cent of first-half profit, up from 41 per cent a year earlier.

Second, the figures imply that China has barely begun to scratch the surface of its bad-loan difficulties. Reported non-performing debt ratios are low: ICBC's was 1.53 per cent at the end of September, down from 1.56 per cent a year earlier. But there has long been speculation about how accurate these numbers are. Chinese bank IPO prospectuses hint at liberal definitions for bad debt.