Chinese banks’ bad loans are at least nine times bigger than official numbers indicate, an “epidemic” that points to potential losses of more than US$1 trillion, an assessment by brokerage CLSA Ltd showed.
Nonperforming loans stood at 15 to 19 percent of outstanding credit last year, Francis Cheung (鄭名凱), head of CLSA’s China and Hong Kong strategy, said yesterday. That compares with the official 1.67 percent.
Potential losses could range from 6.9 trillion yuan to 9.1 trillion yuan (US$1.06 trillion to US$1.4 trillion), according to a report by the brokerage. The estimates are based on public data on listed companies’ debt-servicing abilities and make assumptions about potential recovery rates for bad loans.
Cheung’s assessment adds to warnings from hedge-fund manager Kyle Bass, Autonomous Research analyst Charlene Chu (朱夏蓮) and the IMF on China’s likely levels of troubled credit. The IMF said last month that the nation might have US$1.3 trillion of risky loans, with potential losses equivalent to 7 percent of GDP.
CLSA estimates bad credit in shadow banking — a category including banks’ off-balance-sheet lending, such as entrusted loans and trust loans — could amount to 4.6 trillion yuan and yield a loss of 2.8 trillion yuan.
CLSA cites a diminishing economic return on stimulus pumped into the economy as among the reasons for a worsening outlook, with Cheung saying at a briefing that bad loans had the potential to rise to 20 to 25 percent.
“China’s banking system has reached a point where it needs a comprehensive solution for the bad-debt problem, but there is no plan yet,” he said in the report.
In one initiative, the government may let banks convert some bad loans into equity, a tool used to bail out the banking system and state-owned enterprises in the 1990s. IMF staff are among those to have warned that such a move could backfire by lending support to debt-laden “zombie” companies that should be allowed to fail.
Chinese firms are struggling with record-debt redemptions this year as Premier Li Keqiang (李克強) seeks to wipe out zombie corporations amid the country’s weakest economic expansion in a quarter-century. At least eight firms have missed local note payments this year, already exceeding the tally for the whole of last year and there are indications the number may increase further.
On Thursday, Dongbei Special Steel Group Co (東北特殊鋼集團) defaulted on bonds a fourth time since March, highlighting spreading credit woes among Chinese firms as economic growth slows.
The maker of alloy steels used in machinery and car parts failed to make principal and interest payment due on 700 million yuan of bonds with a 5.88 percent coupon, the Shanghai Clearing House said in a statement.
Baoding Tianwei Yingli New Energy Resources Co (保定天威英利新能源), which missed a note payment last year, said on Thursday it was uncertain if it could repay securities due on Tuesday.
On Wednesday, Inner Mongolia Nailun Group Inc (內蒙古奈倫集團) said that it would not be able to meet demands of investors exercising an option for the early repayment of notes the next day, according to a statement to the Shanghai Stock Exchange.
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