The latest Chinese news to hit the stands these past weeks have been about China’s Non-Performing Loans. Simply put, the amount of China’s non-performing loans have risen to an amount which have suprised experts. Many are saying the amount of non-performing loans is a good indicator of China’s true current financial situation. Others also claim that the true amount of these loans are are actually more than the number shown in reports. Non-perfoming loans have been growing in China since 2013 at an expodentially fast rate, much larger than that of many other countries. Today, we at CNBizCheck want to explore the reasons behind this phenomenon and possible implications for the future of China’s economy.
What’s a Non-Performing Loan?
What exactly is a non-performing loan, though? A Non-Performing Loan, sometimes abbreviated to NPL, is a type of loan that simply has not been receiving payment back after a set amount of time. For example, Construction Company A takes out a loan from a bank to build a house. Later, after Construction Company A finished building the house, they find that they can’t find any potential buyers of the new property. The loan they took out from the bank cannot be paid back. If no payment, including interest, is paid back to the bank for 90 days, the loan becomes labeled as a non-performing loan. Banks label loans such in circumstances where the lenders cannot repay to inform investors of the probability of the loan being paid back.
What’s Going on with NPLs in China?
In China, commercial banks have reached 4.6 trillian yuan ($706 billion) at the end of March 2016, a jump of over 428 billion yuan from December 2015. This pace shows that loans are souring while the country’s economy has been slowing down. People are making the correlation between the two realities as more than just a coincidence. According to the China Banking Regulatory Commission (CBRC) NPLs have risen to an 11 year high (1.4 trillion yuan), accounting for 1.75% of the country’s total bank lending. By the end of 2015, NPLs accounted for a total of 1.67 percent of all Chinese loans, meaning the past 5 months this total has increased 8 percentage points.
What’s the Significance of this Situation?
The realities of China’s banking do hold weight in this situation. Most Chinese commercial banks do not issue data as rigid and reliable as data produced in the west. Often, these banks produce numbers that are favorable to their own situation to keep investors from panicking and the economy on track. Many banks in China are simply, as Forbes puts it, “..one reservoir of bad debts waiting to be purged by the next state led initiative, and NPLs are merely one category of debt.” This debt, the IMF reported, is not dangerous, but steps need to be taken to offload these assets onto the backs of state-owned banks. “This may be a good thing”, remarks Andrew Collier, of Orient Capital Research in Hong Kong, “as the migration of such debt indirectly onto the state will force the state eventually to acknowledge this debt.” Resulting in a “government bailout” of sorts.
For Chinese lenders, the build-up of bad debts, which have increased for 18 consecutive quarters, followed the state-driven credit boom of 2009 and has shown no sign of slowing. This is making policymakers mull unconventional measures to prevent a potential debt crisis.
Beijing has given six banks a total quota of 50 billion yuan to issue asset-backed securities with NPLs as underlying assets.
Policymakers are also preparing to reintroduce debt-to-equity swaps, a measure that saved banks from mountains of bad loans in the early 2000s by asking them to convert their loans to troubled state-owned enterprises into shareholdings.