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China economy

Mounting bad debts rock 'the cradle' of enterprise in Wenzhou

Non-performing loans pile up in Wenzhou, raising worries about credit at mainland lenders, but levels still below those at US banks

PUBLISHED : Wednesday, 10 October, 2012, 12:00am
UPDATED : Monday, 30 May, 2016, 5:00pm

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The rapid growth in the level of bad loans in the entrepreneurial hub of Wenzhou is raising danger signs about a potential deterioration in credit quality at mainland banks.

The non-performing loan (NPL) ratio in the city rose for the 12th consecutive month to reach 3 per cent at the end of August, or 21 billion yuan (HK$25.7 billion), the highest level in a decade, the state-owned China Securities Journal said yesterday, citing unnamed officials.

By comparison, bad debts were just 0.37 per cent of total loans at the end of August last year.

The article said the latest figure was up 0.15 percentage point from July, and had more than doubled since the start of this year.

Liao Qiang, a Beijing-based analyst at global credit rating agency Standard & Poor's, said the debt level was still lower than the NPL ratios of banks in the US and Europe, but the rapid growth was worrying.

"Although 3 per cent is not an alarming figure, the situation in Wenzhou could deteriorate", given the slowing global economy, he said.

The southeastern coastal city in Zhejiang province is known as the cradle of private business on the mainland and a hub for small- and medium-sized enterprises that manufacture everything from spectacles to shoes. The city suffered a credit crunch last year as private lenders halted credit after a number of borrowers defaulted on their loans.

Wenzhou is not the only Chinese city under threat.

"We don't rule out that the credit quality in other cities will deteriorate, particularly in export-dependent coastal cities and provinces," Liao said, pointing to the provinces of Guangdong and Jiangsu as well as other cities in Zhejiang.

On Monday, the World Bank lowered its forecast for growth in China's gross domestic product this year to 7.7 per cent, due to weak exports and sluggish investment, while the International Monetary Fund has lowered its estimate to 7.8 per cent. China's official GDP target for this year is an expansion of 7.5 per cent compared with 9.3 per cent last year.

The present weakness in exports could lead to overcapacity in some export-related industries, Liao said.

He added that if corporate losses were short-term then credit quality was unlikely to get worse, but if the red ink lasted for a long time, then the level of non-performing loans would increase.

As of the end of last year, the average non-performing loan ratio at the mainland's four biggest banks stood at 1.1 per cent.

Regarding the impact on China's banking system, Liao said banks' capital remained at sound levels and they could withstand an NPL ratio of 3 to 4 per cent. But he added that a "rapid deterioration in a short span of time" could put pressure on banks' credit ratings.

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