The health of China's already troubled banking industry may deteriorate further if Beijing is successful in its effort to brake the issuance of new loans, but a financial crisis is unlikely anytime soon, analysts at credit-rating agencies and other experts said on Friday.
Chinese banks, frequently under pressure from local government officials, have been extending large loans to ailing state-owned enterprises that need the money to repay previous loans.
"Because of high leverage and interlocking debt relationships among borrowers, the risk exists that a sudden contraction of credit could precipitously trigger cash flow problems for a significant number of them, and the banks will end up bearing the brunt," Moody's Investors Service warned in a new report on Friday.
China's so-called Big Four national banks have started lending more cautiously during the last year, but many other banks have not, the Moody's report said. If the economy slows, it said, these other banks will see a sharper drop in profits and a bigger rise in loan defaults, and will have more trouble replenishing their capital.
Ryan Tsang, the director of greater China financial-services ratings at Standard & Poor's, agreed.
"The banking sector is vulnerable," Tsang said, and slower growth "could present another challenge to a sector which is trying to reform," though probably not deliver a crippling blow.
Standard & Poor's estimated last summer that China's banks were not receiving timely payments of interest and principal on 45 percent of their outstanding loans -- twice the proportion acknowledged by Beijing, and far higher even than in countries like Japan that have struggled with bad-loan problems. China's main banks have not yet issued detailed annual reports this spring, and neither Tsang nor Moody's hazarded a guess on Friday about what China's bad-loan rate was now.
Chinese banks have a hard time dealing with loan defaults, because the country lacks the kinds of foreclosure and bankruptcy systems found in the West. It is difficult for them even to stop making new loans to insolvent state-owned companies, because the companies employ too many workers for it to be politically feasible to shut them. And Beijing has disclosed a large number of investigations in the last two years into bank frauds, some running to hundreds of millions of dollars.
But the banks have some fundamental advantages as well. Chinese households still have one of the world's highest savings rates, approaching 40 percent of income in urban areas, and since there are few other places to put personal savings, the banks are awash in deposits. And the central government stands fully behind the banks, having already performed three bailouts in the past six years.
The China Banking Regulatory Commission said recently that while the total face value of nonperforming loans at the Big Four banks had been slowly declining, the figure for the rest of the banking system rose in the first quarter, a potentially troubling development in an economy that grew at a torrid 9.7 percent annual rate in the period. The commission was closed on Friday for a national holiday, and its officials could not be reached for comment. At the Asian Banker Summit, a trade conference held here on Friday, speakers and those attending voiced concern about China's banks, but not immediate alarm.
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