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Bad Debt Soars 35% In China As Government Set To Fabricate Dismal Loan Data
Back in March, we noted that decelerating economic growth and bad debt are taking a toll on profitability at China’s largest banks, leading them to slash payouts to shareholders.
"Particularly hard hit is ABC, which saw its non-performing loans jump 25bps Q/Q," we observed, adding that "NPLs for loans made to manufacturers more than doubled that number, rising 54bps sequentially." That figure underscores the degree to which China’s transition from an investment-led, smokestack economy to a model driven by consumption and services is weighing heavily on industry and in turn, on banks that lend to the manufacturing sector.
Although NPLs have been rising for some time in China, determining the true extent of the problem is largely impossible due to Beijing’s "management" of bad loans. As we outlined in "How China’s Banks Hide Trillions In Credit Risk," there’s no way to know how pervasive Beijing’s practice of forcing banks to roll-over problem loans truly is, meaning that even if we ignore the fact that quite a bit of credit risk is obscured by the practice of shifting it around, moving it off balance sheet, and reclassifying it, (i.e. if we just look at traditional loans) it’s still difficult to know what percentage of loans are actually impaired because it’s entirely possible that a non-trivial percentage of sour debt is forcibly restructured and thus never makes it into the official NPL figures.
Indeed, the fact that NPLs are remarkably similar across banks suggests the numbers are, much like China’s GDP data, "smoothed out." That said, a look at "special mention" loans and overdue loans can help to paint a more accurate picture although the figures still look grossly understated.
Source: Fitch
On Thursday, we got still more evidence that the NPL situation is deteriorating rapidly in China when Reuters reported that according to a transcript of an internal meeting of the China Banking Regulatory Commission, bad loans jumped CNY322.2 billion in H1 to CNY1.8 trillion, a 36% increase. The NPL ratio was 1.82 as of June 30, up 22 bps on the year. Here’s more:
Shang Fulin, chairman of China Banking Regulatory Commission (CBRC), told an internal meeting last week that non-performing loans (NPLs) at banks rose 322.2 billion yuan in the first six months of the year to 1.8 trillion yuan ($289.9 billion), according to a transcript of the meeting seen by Reuters.
He also said the banks' profit growth in the first-half slowed by 13.03 percentage points from a year ago, with total net profits amounting to 1.1 trillion yuan in the first six months.
"In the bigger context of (China's) economic slowdown, the whole truth of the banking sector's credit risks is beginning to emerge," Shang said, according to the transcript.
Lower profit growth will "reduce shareholder return, weaken banks' capability to supplement capital and prevent risks," he added, saying it was now the "new normal."
Of course this "new normal" isn’t going to please the Politburo which is why we suspect efforts to manage the data will now kick into high gear and indeed, it looks as though the PBoC has already figured out a way to mask anemic demand for credit.
According to MNI, the central bank will begin including interbank loans to non-banking institutions in its calculations, a practice which could mean the headline figure will be "three times" what it would have been were it calculated using the old methodology.
The PBoC, MNI continues, will include loans made to CSF, China’s plunge protection vehicle, in the figures, meaning Beijing will pretend that the state-directed effort to artificially shore up the country’s stock market represents real, organic demand for credit.
As for the real situation, one loan officer at a Big Four bank told MNI that "our bank's loans in July in the Beijing area were even weaker than in June. We can't find the demand."
But that's ok because in the absence of government intervention, Chinese stocks "can't find" a bid, which is why, as Bloomberg reported earlier today, CSF "seeks access to as much as CNY5 trillion to support the stock market if needed."
The government has already lined up nearly CNY3 trillion for the vehicle, so where will the other CNY5 trillion come from you ask? Why, from the banks of course. Here's Bloomberg again: "CSF is currently seeking funding from banks for periods ranging between 3 and 12 mos at rate of as much as 4.4%."
So there you have it, another CNY2 trillion in loan "demand" created out of thin air.
The only question now is what happens when the PBoC loses complete control of the market again and the loans to CSF themselves go bad.
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Been on the phone to Janet have they?
They owe it to themselves.
China is like a big Jenga puzzle
The global debt bomb Jubilee cometh...
If a Chinaman cheats in the open does Yellen raise rates?
This is so lame.
Print bitch
The Year of the (Dead) Cat (Bounce) ! The Year of the Rabbit (stock splits) ! The Year of the Snake (buy backs, snake eating it's own tail) !
organic growth - like between my toes?
jb
http://blogs.wsj.com/economics/2015/02/01/qa-what-the-18-trillion-nation...
The Chinese have got it all wrong! The role of the Con Market is to fleece the suckers. But, pouring money into the Con Market enables the suckers to sell into, what are ultimately PBOC-funded rallies. So, the suckers withdraw capital from the Con Market, via rallies funded by PBOC loans, either paying down margin debt, owed to the shadow banking system, or pocketing a nominal profit. The PBOC gets left holding the bag as the Con Market fully deflates. The suckers have turned the tables! The Con Market is fleecing the PBOC! Watch out below when the PBOC fails!!!
"Off the record? Yeah, we're pretty much fucked."
Bank of China (BOC), China Construction Bank (CCB), Agricultural Bank of China (ABC), and Industrial and Commercial Bank of China (ICBC) are STATE banks.
Being a STATE bank means that Chinese government doesn’t just roll over loans, they make them DISAPPEAR.
How do you think all of the old Communist debt just disappeared? Before China could get MFN status, all kinds of legerdemain was engaged and presto good assets. China had to meet Western BIS standards for their debts. Poor communist enterprises just shuffled off of the books.
Japan did the same thing at the end of WW2. Former bad debts suddenly became good debts and the basis for new credit money creation. All of a sudden Japan had new money to do operations.
Projection is where one projects their own view onto another. In the case of China, they have a mixture of private banks and STATE BANKS. The state banks are under political control, whereas in the WEST, it is private debt spreading banks that tend to be over the politics. One should not project Western finance onto China.
Overdue loans and Non Performing loans data is mixed between State Banks and Private Banks. These debt instruments are managed under different law between the two types of banking entities. This is conflation of data, and is another logical and conceptual error. One should not assume debt instruments are the same, because they aren’t. China can just disappear their loans (debt instruments), they have before and they can do it again. Probably they are doing it on a regular basis now, but it would be hard to find the data unless one is an insider.
One has to know where and how the debt instruments are being hypothecated. In the case of China, they are not taxing land rents, so a lot of the debts relate to private creation against FIRE, the same mistake that the U.S. and West routinely engage in. This asset pushing causes unwanted positive feedback, a “euphoria” where it seems like everything is going up magically. It also causes the stock market to buoy as the new credit funnels into stocks, causing false pricing signals.
In the first cycle of Chinese private debt formation, land had a form of taxes in that there were fees paid to communist officials. After that first cycle, then the land is released to the market, to then be rehypothecated, thus pushing up prices in a credit driven spiral.
Two cities in China are experimenting with Georgist type rent taxes, so some Chinese leaders are not stupid and realize the money system is a problem. When rents are untaxed it also causes property bidding, thus pushing prices to the highest bidder; and highest bidder is the one who can take out the largest loan.
Outlaw the phrase "NPL". Fixed.
If it drives stock pile-able commodities down, the People's Republic of China is going to do it until traders around the world figure out the tricks that are sinking the commondities market.
China's massive, earth-shaking building orgy pushed up commodity prices. The orgy has stopped, so commodities are coming back down to reality: There's way way too much now.