China’s bad loans likely underestimated, says central bank adviser

PUBLISHED : Saturday, 10 September, 2016, 1:58am
UPDATED : Saturday, 10 September, 2016, 1:58am

China’s bad loan problems may have been underestimated as the economy continues to slow down, Huang Yiping, an adviser to the People’s Bank of China, China’s central bank said on Friday.

“Official figures may have underestimated China’s bad loan problems,” he said after an event hosted by the American Chamber of Commerce in Hong Kong.

By the end of June, China’s non-performing loans amounted to 1.4 trillion yuan, taking the country’s NPL ratio to 1.75 per cent, according to the latest figures released by the China Banking Regulatory Commission (CBRC), the banking industry regulator.

“Some people doubt the NPL figures from commercial banks, which are the source for government statistics, are smaller than the actual number,” said Huang. In addition, “the NPL ratio doesn’t include broader problem loans”, he said.

Special-mention loans, or loans that banks have extended to borrowers are still capable of repaying debt and interest on time but are highly likely to encounter difficulties to do so, are not included in NPLs but they are likely to become non-performing loans.

The difficult task for China at the moment is how to get rid of zombie companies
Huang Yiping, adviser

“If these broader problem loans are included, the total amount will be much higher,” said Huang.

According to data released by CBRC last month, these problem loans amounted to 3.3 trillion yuan by the end of June and accounts for 4.03 per cent of China’s total loans.

Huang said China’s current economic slowdown is not a cyclical story but a structural one which could last longer than expected and the economy may not bottom out until the new competitive industries are strong enough to overtake the old industries.

“The difficult task for China at the moment is how to get rid of zombie companies,”said Huang, “we need market discipline to root out the zombie firms, in order the support the real economy,” said Huang.

According to Huang, because of the existence of these inefficient businesses, China needs more capital inputs to create every one unit of new GDP than a couple of years ago. The capital input needed is 5.9 today, compared with 3.5 in 2007, according to Huang.

“If zombie companies continue to take in a lot of finances in the market, how could finance effectively support the real economy,” Huang said.

In addition, Huang said China will continue its efforts to open its capital market to the outside world, although no timetable could be given at this stage.

Earlier this year, as a major step to open the financial market to overseas investors, China granted foreign central banks and long-term institutional investors full access to its interbank bond market.

As regards the interbank bond market, “market liquidity is one of the issues that need to be addressed,” he said.

“The buy-and-hold model in China’s bond market could be a concern for foreign investors, and an active secondary bond market is very important,” Huang said.