Coronavirus: Chinese banks face test as bad debts tipped to rise while economic growth tumbles

China may be forced to scale back its deleveraging campaign if it wants to maintain economic momentum amid the ongoing coronavirus outbreak

A recent stress test by China’s central bank showed 17 of 30 local banks would fail to meet their capital adequacy ratio if growth slowed to 4.15 per cent

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The People's Bank of China says it will be more tolerant of sour bank loans which have been affected by the coronavirus outbreak. Photo: Bloomberg

Published: 6:00pm, 19 Feb 2020Updated: 10:20pm, 19 Feb 2020

China’s banking system will be seriously tested by the fallout from the coronavirus outbreak, which could derail growth and trigger a spike in bad debt if banks are told to lend to virus-hit sectors of the economy, analysts said.

The virus outbreak, which has killed more than 2,000 people and infected more than 74,000, is expected to cut China’s gross domestic production (GDP) growth by 1-2 percentage points in 2020 and drag it down to 3 per cent or lower in the first quarter. Many analysts say the economic toll will be greater than that of the severe acute respiratory syndrome (Sars) epidemic in 2002-2003.

A recent stress test conducted by China’s central bank showed that nine of 30 local banks would fail to meet their capital adequacy ratio if growth slipped to 5.3 per cent, and 17 of them would fail if it slowed to 4.15 per cent.

As the coronavirus outbreak continues, growth as low as 5 per cent is turning into a reality and many analysts believe China may be forced to slow its two-year-old campaign to curb debt in the financial system if it wants to boost the economy.

Given the epidemic, corporates and local governments are likely harder hit than the households. It’s therefore likely that the central government will be more lenient in local government debt situation

Amy Yuan Zhuang

“Given the epidemic, corporates and local governments are likely harder hit than the households. It’s therefore likely that the central government will be more lenient in local government debt situation,” said Amy Yuan Zhuang, chief analyst at Nordea Markets.