China warns of increase in bad loans
Chinese regulators have issued warnings of a potentially sharp rebound in non-performing loans, especially among smaller banks that have channeled their funding to “asset bubble-causing” sources.
Some small and medium-sized banks are experiencing deterioration in their assets due to the accumulated risk, according to the China Banking and Insurance Regulatory Commission (CBIRC) in a statement released over the weekend. Capital from these lenders has been funneled into the housing and equity markets, which not only violates regulations, but “causes asset bubbles,” the CBIRC added.
At the end of June 2020, China’s bad debt ratio increased by eight basis points from the end of 2019 to 2.1%.
Tighten the controls
In addition to weaker assets, the CBIRC also highlighted the lag of up to one year in risk exposure, as banks can recognize interest income early even when actual repayment is delayed under new rules. As a result, the regulator urged lenders to prepare for a response to the potentially large increase in non-performing loans that has yet to be reflected on paper.
Profits should be kept to accumulate capital through various means, including reducing bonuses, the CBIRC said.
Risks of assembly
Regulators considered the risk for small and medium-sized lenders, but also signaled that support would be reduced. In April, the head of CBIRC Xiao Yuanqi such support would be concentrated on small businesses while plans were drawn up for a “market-oriented” restructuring of small banks.
Small lenders aside, China’s broader banking system also faces many headwinds. Following several reported bank bailouts and bank runs, regulators have imposed nationwide controls on cash withdrawals and publicly named companies threatening financial stability as “illegal shareholders”.
At the end of 2019, PwC estimated that Chinese banks had $ 1.5 trillion in bad debt, and S&P forecasts predicted nearly $ 500 billion more in non-performing assets due to the coronavirus outbreak.