A week ago, when showing the following chart of Chinese housing trends...
... we reported that the "burst Chinese housing bubble leads to first annual price decline since 2012", and warned that it is only a matter of time before both China's GDP, extensively reliant on housing construction, as well as Chinese bank assets, primarily consisting of housing-related loans and other fixed income exposure, take a major hit
This happened yesterday, when in an exchange filing China's Industrial & Commercial Bank of China, the biggest bank in both China and the entire world, reported its biggest jump in bad loans since at least 2006.
Specifically, ICBC’s nonperforming loans rose to 115.5 billion yuan in September from 105.7 billion yuan in June. The increase was the biggest since quarterly data became available. Nonperforming credit accounted for 1.06 percent of total advances.
It wasn't just ICBC: as the chart from the WSJ below shows, bad debt rose at every single other major bank in China as well:
According to Bloomberg, nonperforming loans rose 9 percent in the third quarter from the previous three months, the Beijing-based bank said in an exchange filing yesterday. This increase surpassed the rise in net income which gained 7.7 percent from a year earlier to 72.4 billion yuan ($11.8 billion).
The problem for China is two-fold. On one hand as Bloomberg observes, "a struggling Chinese economy is weighing on ICBC’s share price and is poised to drag the company to its weakest full-year profit growth since at least 2001 as more borrowers default."
The second problem is that as ICBC felt first hand (and surely underreported, because this is China after all), the soaring bad debt notionals make it next to impossible for the PBOC to inject even more good debt which would promptly turn into NPLs until it ultimately drowns China leading to the mass defaults which the Politburo has been avoiding for so long.
“ICBC remains under pressure as bad loans in China continue to rise,” Zheng Chunming, a Shanghai-based analyst at Capital Securities Corp., said by phone yesterday. “The operating environment for companies is getting more difficult as China’s economy faces downward pressure.”
Furthermore, as noted above, since ICBC is the world's largest bank by assets, it has operations everywhere. "In its overseas push, ICBC this year acquired a Turkish lender, won approvals for a branch in London and yuan clearing operations in Luxembourg and Cambodia, and obtained a banking license in Myanmar. The lender previously expanded in Argentina, Canada, South Africa, Thailand and Indonesia. Operations outside China accounted for 7.1 percent of company assets as of June, up from 6 percent a year earlier.
ICBC set aside 8.2 billion yuan of provisions against potential soured credit, 30 percent more than a year earlier.
“Provision charges will be the biggest swing factor for banks’ earnings,” said Mu Hua, a Guangzhou-based analyst at GF Securities Co. “The more bad loans they write off, the more additional provisions they need to set aside to maintain the required coverage ratio.”
This means that growth not only China but the rest of the world (but not the US, don't worry: the US will successfully decouple from the rest of the world for the first time in history) grinds to a halt, ICBC's balance sheet is about to become an epic disaster, suggesting that instead of spending money on growth and infrastructure projects, China will spend 2015 and/or longer simply trying to keep its banks stable. Just as, according to conventional wisdon, the Fed prepare to hike rates.