China’s real bad debt ratio at least nine times the official number and still growing
Bad debt clean-up more challenging than 1998 debt crisis, analysts say
Mainland China’s bad debts are at least nine times the official number and still growing as the economy slows down despite government stimulus measures, a seasoned market watcher has warned.
Analysts say solving the debt problem will be more challenging than the last debt crisis in 1998 because the mainland’s bad-asset management companies (AMCs) have become more market driven.
CLSA’s head of China and Hong Kong strategy, Francis Cheung, said on Friday that it estimated the non-performing loan (NPL) ratio in the mainland banking sector was 15 per cent to 19 per cent, much higher than the official 1.6 per cent.
“Banks will need to raise 6.8 to 10.6 trillion yuan (HK$8.11 trillion to HK$12.65 trillion), 10 to 15 per cent of GDP, to cover the bad loans assuming a 100 per cent provision rate, based on a 15 to 20 per cent NPL ratio,” he said.
The mainland’s debt to gross domestic product ratio would exceed 300 per cent by 2020, up from the current 200 per cent level, Cheung said.
The official NPL ratio is much lower as it reflects the implicit government guarantee of state-owned enterprises (SOEs) and a continual rollover of bad debts. However, Cheung said, Western banking norms were stricter, with any loan more than 90 days past due categorised as bad.
Meanwhile, the government’s latest stimulus measures were proving less effective at kick-starting the economy and could even create new NPLs.
“We do not have a clear idea of where the new credit goes – a lot it seems to be long-term corporate loans, suggesting credit flowing to infrastructure projects,” he said. “I worry it is not going to the right place ... [and is] providing liquidity, rather than end-user demand.”
He said he expected the mainland’s second-quarter economic numbers would be fine following a strong injection of credit during the first quarter, although the purchasing managers’ index – a barometer of manufacturing activity – was already softening last month, indicating a weakening of recovery momentum.
The International Monetary Fund said last month that China may have US$1.3 trillion of risky loans, with potential losses equivalent to 7 per cent of GDP.
As debts mount, with a corresponding rise in default risks on bond market, the mainland authorities have been implementing or proposing initiatives including debt-to-bond swap schemes, debt-to-equity swap schemes, NPL securitisation, and the sale of NPLs to AMCs, but analysts say the central government has failed to clarify their implementation.
Chen Long, an analyst with Gavekal Dragonomics, said few observers did not believe the government would eventually have to step in, once again, to clean up the banking system.
“The four AMCs that led the bank restructuring of 1998-2005 have since become profit-seeking firms rather than instruments of public policy, and probably will not reprise their leading role,” he said.
Cheung said he had heard the AMCs did not want to take over the bad assets now because they thought prices would fall further.
“Two of the big four AMCs are listed companies now, they are more market-driven ... back in the 1990s, the banks could take off the bad debts at face value, without even accepting a discount,” he said. “I doubt this will happen again this time.”
As for the mainland’s shadow financing, he said the size remained small compared to other countries, and there was less use of leverage, but he still estimated the sector’s bad debts at 4.6 trillion yuan, with potential losses equal to 4 per cent of GDP.