As we discussed previously, delinquent loans in China are a problem... and a growing one [4]. It seems that news is finally starting to filter to a mainstream audience as Bloomberg reports that China’s biggest banks are poised to report the highest proportion of bad debts since 2009 after late payments on loans surged to a five-year high, indicating borrowers are struggling amid an economic slowdown.As S&P warns,"overdue loans are a leading indicator of asset-quality deterioration and show the rising liquidity constraints among borrowers... and the disturbing thing is the end is nowhere in sight." CNY has pluned almost 150 pips to new 19-month lows on the news.
China bad debt at multi-year highs...
[5]
CNY is plunging in the news - back to its lowest against the USD in 19 months...
[6]
How much bad debt can China withstand? We discussed previously [7]...
These numbers tell us that it does not appear that China can bear a very large increase in debt, and that the idea that the government can simply “bail out the financial sector” is erroneous, or at least, a stretch.
China does not have the luxury of the United States, which can spend excessively because foreign countries continue to buy U.S. government debt (as the dollar is the world reserve currency). If the leadership attempts to spend down its large cache of dollar reserves, it will lose control of its currency, as a larger supply of U.S. dollars relative to the Chinese RMB would depreciate the currency unless sterilized.
The only remaining option is the least savory: the Chinese government must control its debt, and this includes reducing overindulgence within the real economy. It seems that the punch bowl is empty already and the party is winding down. Now the question is, who will clean up the mess?
But as S&P warns:
"Overdue loans are a leading indicator of asset-quality deterioration and show the rising liquidity constraints among borrowers,” said Liao Qiang, a Beijing-based director at Standard & Poor’s. “While we believe Chinese banks’ credit woes will unfold gradually, the disturbing thing is that the end is nowhere in sight.”