China warned to prepare for ‘big rise’ in bad loans as financial system braces against coronavirus, rising global tensions

China’s banking regulator has asked the country’s lenders to make preparations for a “big rise” in non-performing loans as part of Beijing’s efforts to brace its financial system for shocks from the coronavirus at home and a hostile environment abroad.

Runs on China’s small banks have become more frequent amid the current turmoil, while the loan repayment capabilities of Chinese companies and households have been undermined by the impact of the coronavirus.

Beijing has made efforts to avoid a broader financial crisis, but it is now facing fresh challenges, the China Banking and Insurance Regulatory Commission said this week.

China has to “prevent the cold ash of shadow banking from burning again”, while avoiding “a resurgence of chaos in real estate financing”, said a statement summarising a working conference held by China’s banking regulator this week.

It has to also “make full preparations to counter changes in the external environment over the long run”, the statement added.

But Qu Qiang, a researcher at Renmin University’s International Monetary Institute, said China is unlikely to see a broad financial meltdown as Beijing has kept credit and liquidity risks in check.

“Banking sectors worldwide are facing an extra test from the pandemic. Like overseas peers, some Chinese banks could run into difficulty because of their operations, but it’s quite normal and won’t endanger the overall system,” said Qu.

China’s official statistics paint a picture of a sound financial system as the non-performing loan ratio of all Chinese commercial banks edged up by a mere 0.05 percentage point to 1.91 per cent at the end of March.