Chinese banks are increasingly drawing on Western ways of selling off bad loans, after four of the largest five lenders reported a spike in defaults in an economy stuttering at its slowest growth rate in 25 years.
The lenders plan to expand the practice of selling bad loans bundled into financial products, to reduce the amount of unpaid debt on their books, according to banking insiders.
The practice, though common in the West, was mostly unheard of in China just a year ago. Its uptake reflects a government policy of relaxing restrictions on financial markets to attract investment, as well as banks’ hunger for ways to deal with a worsening bad loan situation as profit growth flags.
However, analysts say the practice masks the true extent of a situation exacerbated by so-called zombie loans neither in default or written off, languishing with cash-strapped local authorities. Central bank encouragement to increase lending and support the economy could only compound matters, they say.
Banks generally reported bad loan ratios — or the percentage of total lending which has soured — of 1 percent to 1.5 percent.
“I think the real level is around 2 to 3 percent,” Shanghai-based Cinda International Securities Ltd (信達國際證券) chief strategist Chen Jiahe (陳嘉禾) said.
Hong Kong-based Amundi Asset Management investment director Leon Goldfeld estimated the true bad debt ratio would reach 9 percent if economic growth slowed to 6 percent, rather than Beijing’s target of about 7 percent.
Industrial and Commercial Bank of China Ltd (ICBC, 中國工商銀行), Agricultural Bank of China Ltd (AgBank, 中國農業銀行), Bank of China Ltd (BOC, 中國銀行) and Bank of Communications Co Ltd (BoCom, 交通銀行) this week each booked marginal profit growth or contraction for the fourth quarter, with China Construction Bank Corp (中國建設銀行) reporting on Friday.
ICBC also booked a rise in bad loans to small businesses struggling with weaker overseas demand, and from coal-related enterprises in Western China suffering from falling coal prices.
AgBank reported its highest non-performing loan ratio in three years, primarily due to manufacturers, as well as wholesalers and retailers, whereas bad loans rose at their steepest pace in more than three years at BOC. At BoCom, soured debts reached their highest since 2010.
Faced with mounting bad debt, Chinese banks have been grouping soured loans and selling them as potentially high-risk derivatives to local asset managers, bankers said.
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