China warned to prepare for ‘big rise’ in bad loans as financial system braces against coronavirus, rising global tensions
- The China Banking and Insurance Regulatory Commission said this week Beijing’s efforts to avoid a broader financial crisis are facing fresh challenges
- China’s official statistics paint a picture of a sound financial system, but cracks are appearing in the banking system at a grass-roots level
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.
Chinese banks could run into difficulty because of their operations, but it’s quite normal and won’t endanger the overall system
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.
But it is increasingly evident that the banking system has started to show cracks at a grass-roots level, especially rural and smaller regional banks, as well as lenders in poorer regions.
Official data showed that the non-performing loans ratio at rural banks stood at 4.09 per cent at the end of March, more than double the national average.
“It is worth keeping a close eye on this because the impact of the coronavirus on asset quality will eventually show up in the second half of 2020 and early next year,” said Wang Jun, chief economist at Zhongyuan Bank in Henan province.
China’s banking system is also a hotbed for corruption. In a recent case, three former top officials at the Shanxi provincial rural credit cooperative, the backbone financial institution in charge of rural financing in the coal-rich province, were placed under investigation for corruption. Jing Hui, who had been the top financial regulator in the province until June 2020, was also found to have 400 million yuan (US$57 million) in cash stored at his home.
01:18
WHO chief slams Pompeo’s comment that WHO is 'co-opted' by China
Alicia Garcia Herrero, chief Asia-Pacific economist at French investment bank Natixis, said China’s banking sector faces a catch-22 situation, given it has vital responsibilities but contradictory goals, including increasing lending to weak links in the economy in line with government policy while maintaining sound asset quality as required by bank supervisors.
Many of the loans were given out to smaller, private sector businesses, which were generally viewed as high risk before the coronavirus outbreak.
