Rise in bad loans threatens China banks

The potential surge in bad loans could place the Chinese banking industry at risk.

According to a survey report released by the China Orient Management Corp, Chinese commercial lenders may see a sharp increase in new bad loans from this quarter through the first half of following year.

The results of the survey conducted suggest that about 69 percent of respondents believed the NPL for Chinese banks which is recently under 1 percent could rise to a range of 1-2 percent by the end of 2012. On the other hand, 20.6 of those surveyed believed that it could jump significantly to 2-3 percent.

Additionally, the report found that 53.6 percent of those surveyed believed the increase in China’s total NPLs would increase to less than 10 percent this year, while the 28.7 percent believed that it could climb to as high as 10-20 percent.

Hence, the level of bad debt is expected to increase by 10 percent this year, taking the non-performing loan ratio to 1 percent to 2 percent of the total by the end of the year. The report suggests that this is primarily driven by the increasing number of troubled loans in the property sector.

There is a pervasive belief among economic analysts that the real NPL for Chinese banks could be greater than the official rate of 0.97 percent. Such suspicion may be attributed to the declining economic growth that continues to haunt the country.

China’s annual gross domestic product slowed to 7.5 percent in the third quarter to its lowest rate since the first quarter of 2009. The 7.4 percent expansion was also below the government’s target percentage level and a slowdown from 2011’s growth rate of 9.2 percent.

A recent Reuters poll found that economists anticipate China’s growth rate in 2012 to be its slowest since 1999.

China Bad Loans: Causes and Remedy

The nation’s four largest banks saw a surge of 2.1 billion yuan in bad loans during the third quarter from the previous three months. Some are even facing growing burden from bad debts amid stagnating economic conditions.

Real estate is the underlined cause of the mounting bad-debt problem in China’s banking sector, according to the report. It has been further added that the high percentage drop in housing prices could lead to significant losses that Chinese banks may not be able to absorb. However, no additional details concerning this issue were given. Lending to export-oriented firms as well as local governments through financing vehicles, have also greatly contributed to the unrelenting rise of non-performing loans.

With the financial crisis continuing to cast a shadow over the global economy, there are no clearer economic signs of a rebound in China’s growth rate. In fact, there is a greater possibility that the level of bad loans will increase at a faster pace if concerns about a rebound in inflation leads China to implement a tightened monetary policy.

A commentary published by a state-run financial newspaper cautioned that the financial risks from the real-estate industry and government debts will lead to a dramatic increase in non-performing loans in the near future. Thus, to ease this threat, financial regulators are advised to improve risk prevention efforts and results.