CLSA Just Stumbled On The Neutron Bomb In China's Banking System

Tyler Durden's picture

Two weeks ago, using Macquarie data, we found something disturbing at China's micro level: not only are a quarter of Chinese firms with debt unable to cover their annual interest expense currently...


.... but when just looking at the commodity sector, roughly half of all companies are in the same dire straits, as a result of the collapse in commodity prices which translates into a drop off in cash flow which makes just the annual all-in cash interest payment impossible .


Over the weekend, Hong-Kong based CLSA decided to take this micro-level data and look at it from the top-down. What it found was stunning.

According to CLSA estimates, Chinese banks' bad debts ratio could be as high 8.1% a whopping 6 times higher than the official 1.5% NPL level reported by China's banking regulator!

As Reuters reports, the estimate is based on analysis of outstanding debts for more than 2700 A-share companies (ex-financials) and their ability to repay loans. Or in other words, if one backs into the true bad debt, not the number given for window dressing purposes by Chinese "regulators", based on collapsing cash flows, what one gets is a NPL that is nearly 10% of all outstanding Chinese debt.

Reuters has some more details on the methodology:

  • Two consecutive years of a co's interest coverage (EBITDA/interest expense) below 1x or losses for two successive years qualifies for debts to be treated as "bad" in CLSA's analysis.
  • By these measures, wholesale & retail and manufacturing sectors boast the highest implied NPLs at 21.1% and 15.8% respectively, taking into account total debt
  • While China's real estate sector has been the most aggressive in adding debt, profitability at developers in tier-1 cities has held up well, muting the overall NPLs for the sector
  • Developers in tier-2 and tier-3 cities, however, show high implied NPLs
  • As bad debts rise, burden falls on PBOC to ensure sufficient liquidity so that Chinese banks can gradually absorb the credit costs, CLSA says.

Yes, the PBOC's burden most certainly rises, and what a burden it is: here's why.

The chart below shows the history of total Chinese bank assets: as of the latest official data, the number is roughly $30 trillion.

If one very conservatively assumes that loans are about half of the total asset base (realistically 60-70%), and applies an 8% NPL to this number instead of the official 1.5% NPL estimate, the capital shortfall is a staggering $1 trillion.

In other words, while China has been injecting incremental liquidity into the system and stubbornly getting no results for it leading experts everywhere to wonder just where all this money is going, the real reason for the lack of a credit impulse is that banks have been quietly soaking up the funds not to lend them out, but to plug a gargantuan, $1 trillion, solvency shortfall which amounts to 10% of China's GDP!

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BullyBearish's picture

Don't want to be long when that rubber band snaps back...

Money_for_Nothing's picture

You would look like Harry Reed :-)

ersatz007's picture

"I don't think that means what you think it means"

surfersd's picture

BTW the inside story is that Harry's brother is the one tht fucked him. Family outing and he got pissed and he kicked the shit out of old Harry.

Hype Alert's picture

Get back to work, Ms Yellen.

Pontius's picture

Chinese are so frugal.

DogeCoin's picture

To QE Infinity and Beyond!


nmewn's picture

Vice Public Security Minister Meng Qingfeng would never lie or work ofr liars, he works for the state! He's there to protect the people!

(Roll nationalistic martial music sound clip)

Liars! Arrest them Meng!!! ;-)

Dragon HAwk's picture

Sometimes a number gets so Big... you just can't hide it any more....

StychoKiller's picture

This is the problem with sweeping things under the carpet, sooner or later, the bulge in the middle is quite obvious.

old naughty's picture

when the hole gets too big...

the carpet, along with all swept under got sucked into the hole.

Yen Cross's picture

 I find it rather humorous that banks are not only shitting their shorts, but use stupid graphs instead of spread sheets. I guess it's easier for the elected plebes they put in office.

 I wonder how many bankers are capable of reading those charts. Seriously? We've resorted to colored lines in pictographs, to downplay the severity, of mal-investments, and mis-allocation

 This is nothing aganst Tyler. He's the messenger.

 If I even wanted to waste the time trying to decipher those color bands, one thing stands constant.

 The axis from "left to right" is decending. Bitchez

 Here's some good fun.

 MacroTrends | Economic Charts and Historical Data

 People get distracted by colors, and mistakenly think increased debt obligations are a sign of growth.

gatorengineer's picture

Wonder where amazon uber twtr and netflix would do on this kind of a review...

MrNoItAll's picture

What's another trillion?  They'll print it.  Invest with confidence.

epicurious's picture

Why are they just injecting excremental liquidity?  There must be something rotten underneath it all.

tarabel's picture



First off this exactly the same sort of behavior that western banks employed with their QE bonanza. They parked it so their reserve requirement ratio would remain tolerable and they woldn't be seized as insolvent.

Secondly, what's the worst NPL sector according to this article? Wholesale and Retail.


That whole faked-up domestic consumption meme they shout about doesn't look quite so healthy when paired with this statistic.

Instead of the Chinese economy being the menacing Yellow Peril of old, it turns out that it is actually more like a Yellow Submarine and it's about to dive, dive dive.

two hoots's picture

Yellen may never get the chance to raise or not raise rates. It might implode first.

laomei's picture

The NPL standards in China are a joke and meaningless.  It's not NPL until the principal repayment date has passed. Missing interest payments doesn't get counted.  SOP right now is to keep issuing loans to cover the interest payments and then the principal repayment, rolling it over with zero legitimate basis.  This will end well.

Aussie Battler's picture

Bullish for Aussie house prices surely!

Aussie Battler's picture

Bullish for Aussie house prices surely!

PrimalScream's picture

8.1% ????


natxlaw's picture

if it's missing, just print it. You got it!

kuro_neko's picture

a 10% solvency shortfall ? just let the govt borrow 10% of GDP and plug that hole....

starman's picture

Sum ting wong! 

Iam_Silverman's picture

Dang, where is our little buddy Chinese troll now?

He would entertain us with trite repetitions of "it's a very mattering thing" and reference our "American Exceptionalism" and "Chinese something or other".  Was it nationalism?  Crap, my brain is on overload trying to remember all of his funny lines he regurgitated on every article that purportedly revealed the dark truth about the state of Chinese financial affairs.

Someone help me out here!


Now, on the serious side - do they break down the NPL data to show the categories for each?  A bad loan on real estate is at least collateralized by a physical property.  A loan issued to buy stock on margin is backed by wispy little electronic stock certificates of dubious to no value.  Loans issued for purchases of commodities are backed by a physical thing with some value (unless rehypothicated offshore).

Peter Pan's picture

In my view if China was to fess up to having around 8000 tonnnes of gold at $4000 an oz then that will work out to about $1 trillion. That might fill a few holes for them if things get out of hand.

I just don't know what they are going to do with all their excess capacity and all their excess males.

Last of the Middle Class's picture

QE is over! Quietly adding trillions to the national debt 3 or 4 times a year is just accounting mistakes being uncovered. 

TheCentralScrutinizer's picture

Does it make on wonder about the Fed's repo actions last month?

Could it be China is increasing it's selling of Treasuries in order to cover this deficit??

TheCentralScrutinizer's picture

Does it make on wonder about the Fed's repo actions last month?

Could it be China is increasing it's selling of Treasuries in order to cover this deficit??