Outlook for mainland bad debts worsens

Credit Suisse yesterday substantially raised its forecast for the proportion of non-performing loans (NPLs) at mainland banks to between 8 and 12 per cent 'in the next few years', adding to worries over the lenders' asset quality.

It has previously forecast the ratio would be between 4.5 per cent and 5 per cednt. The sharp upward revision reflects growing credit risks in four areas: real estate, manufacturing, local governments, and small and medium-sized enterprises (SMEs), Credit Suisse analysts wrote yesterday. The new estimate, among the harshest by any bank, follows a flood of reports that manufacturing SMEs are struggling and businessmen in coastal provinces running away from their debts, and that property sales are likely to cool because of Beijing's curbs on issuing loans.

The four sectors the Credit Suisse report highlights account for 55 per cent of lending but are 'expected to contribute more than 80 per cent of potential NPLs', it says.

The percentage of bad loans on the books of mainland banks dropped 10 basis points from March, to 1 per cent at the end of June, according to the China Banking Regulatory Commission.

However, many analysts forecast that figure will rise as the credit tightening measures reduce economic growth and as loans to local government financing vehicles (LGFVs) turn bad. These entities received the bulk of bank loans when the government turned on the taps during the financial crisis to encourage infrastructure investment.

If LGFV loans can't be eventually recovered, 'stagnant financial reform and slow economic growth could lead to significant asset quality problems', Barclays Capital economists wrote last week. In May, Standard & Poor's said the NPL ratio could reach 5 to 10 per cent in the next three years if 'lending rates go up significantly' and 'government support to [infrastructure] project loans turns out to be negligible'.