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  • Apr 17, 2014
  • Updated: 9:20pm
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BANKING

Chinese banks' asset quality remains under pressure

Bad loans at mainland banks likely to rise further amid slowdown in economic growth

PUBLISHED : Saturday, 15 February, 2014, 1:47am
UPDATED : Saturday, 15 February, 2014, 1:47am

Mainland banks' asset quality will stay under pressure in 2014 as the amount of bad loans rose in the fourth quarter of last year, the ninth consecutive quarterly increase, and it is expected to grow further due to the burden imposed by a slowing economy.

Non-performing loans at mainland banks jumped 28.5 billion yuan (HK$36.2 billion) in the quarter to 592.1 billion yuan, the highest level since September 2008, the China Banking Regulatory Commission said on Thursday.

The bad-loan ratio increased to 1 per cent at the end of December, the loftiest mark since the end of 2011. The figure stood at 0.97 per cent three months ago.

"The ratio is expected to further rise to 1.2 to 1.3 per cent at the end of this year," said Shen Jianguang, Mizuho Securities' Greater China chief economist. He took note of credit risks in industries such as shipbuilding and steel manufacturing, which face overcapacity problems.

Given the slower pace of economic growth and looming overcapacity in various industries, banks' asset quality would see increasing pressure, Shen said.

Mainland growth slowed to 7.7 per cent in the fourth quarter from 7.8 per cent in the third. Growth for this year was forecast at 7.4 per cent, a Bloomberg survey showed.

Wang Tao, an economist at UBS Securities, expects mainland banks' bad loans to keep growing this year amid the deceleration in economic growth. The risk associated with local government debts would remain, but the overall economic slowdown would be the main reason to drive up bad loans, she said

"The overcapacity problem in various industries will be a major concern," Wang said.

The bad-loan figures might not be able to reflect the actual loan quality of banks as the credit risk of the shadow banking sector was not factored in, she said, warning against risks in off-balance-sheet lending.

Liao Qiang, a senior director at Standard & Poor's, said the loan quality of mainland banks was expected to deteriorate noticeably this year.

"Banks remain heavily exposed to debt-laden local government financing platforms and manufacturers saddled with overcapacity because the country's decade-long construction boom is cooling," Liao said in a research report.

Beijing's effort to rein in the rapid growth in shadow banking might result in tightened credit for certain segments such as local government projects and property developments.

"A drain of credit for these segments may lead to a surge in [bad loans]," Liao said.

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With capital control most of the money in China has to stay inside the country.
Unless stored under the mattress the money still stays mainly in the banks.
Given financial repression, and without full interest rate liberalization, the interest cost to the banks is still relatively very low.
The central bank can always relax the banks' capital ratio to increase their lending ability.
New debt can always be issued to cover the old.
The liquidity is always there.
The banks’ liquidity hides the banks’ insolvency, for a very long time already (‘The American Phoenix’).
And one's liability is another's asset. They all cancel out if China's future generation is taken into consideration.
Also the country has got a very rich US dollar reserve.
So it’s business as usual, so long as the size of China’s net external debt is relatively small and controllable (like Japan's).
Remember what the Terminator told John Connor in Terminator 2?
No problemo.

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