Chinese banks raise dams, fend off toxic debt crisis

(From Caixin Online)

Local banks are successfully managing 1.92 trillion yuan worth of non-performing loans, but tomorrow could bring a flood of bad debt

By staff reporters Huo Kan and Wu Hongyuran

Figurative dams and diversion canals have been popping up across China’s financial landscape as banks scramble to prevent a flood of toxic debt.

So far, creative engineering has helped bankers keep non-performing loans under control. With support from and sometimes in spite of government regulators, banks have effectively managed the financial stress by rolling out a steady stream of debt-management tools since late 2011.

hands2Their efforts are continuing. Banks have found ways to sell off bad debt and roll over loans. Meanwhile, the People’s Bank of China and China Banking Regulatory Commission (CBRC) are testing a new bad-loan securitization program.

And regulators are not especially worried. A CBRC official who asked to remain anonymous told Caixin that healthy provisioning means the nation’s banks can currently accommodate up to 3 trillion yuan in debt write-offs. “The overall risk is still under control,” said the official.

An executive at a state-owned bank who requested anonymity agreed banks overall have set aside enough money – up to 3 percent of the total amount on loan – to cover risks.

Nevertheless, the debt waters are rising. According to government data, the banking sector’s total burden of bad loans rose in October for the 16th consecutive quarter to 1.92 trillion yuan. Toxic debt levels have climbed by more than 500 billion yuan since the beginning of the year.

The ratio of bad loans to total loans rose 0.78 percentage points in October from September to more than 2 percent, official data show. State-owned and private commercial banks held most of the overdue debt – about 1.27 trillion yuan – while the bad-loan ratio for these banks clocked at 1.76 percent.

Non-performing loan levels are expected to rise for “awhile”, a source close to the central bank who asked not to be named said.

And the official figures may be telling only part of the story. A November 24 survey by China Orient Asset Management Co., a state-backed fund asset manager in Beijing, found that more than 93 percent of surveyed bankers think the bad loan situation is worse than the data indicates.

A bank official in the eastern province of Jiangsu said the current level of provisioning is not high enough to adequately hedge against risk. And many banking sector observers think toxic debt levels will continue rising as the economy slows over the next few years. An executive at China Huarong Asset Management Co., a Beijing-based asset management firm, said he expects another five to 10 years of bad-loan headaches.

“Macroeconomic indicators for October and November were not good,” said the executive, who declined to be named. “And considering that restructuring will only deepen, the banking industry’s non-performing loans will continue to grow.” Read more


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