China’s looming NPL crisis
China’s banks are lending a hand to support the government’s efforts to stimulate the economy. But do they risk losing an arm and a leg if the economy fails to grow as expected? Sudip Roy reports from Beijing.
LEVERAGE IS BACK – at least in China. In just the first two months of the year, China’s banks advanced a mind-boggling Rmb2.7 trillion ($390 billion) of new loans. That amounts to more than 10% of China’s GDP.
The banks aren’t finished yet. Prime minister Wen Jiabao has set a new loan growth target of Rmb5 trillion for 2009 to support his government’s Rmb4 trillion economic stimulus package, which was announced last November. It’s enough to make the west’s leaders cast an envious eye towards Beijing as they struggle to encourage their banks to increase new loans.
The lending spree in China, however, has reignited concerns about an issue that has wrecked the country’s banks in the past: bad debt. Although no one believes China will see the non-performing loan levels of 2003, when they reached 20.4% of total loans or 16.5% of GDP, concern is mounting among some analysts that its banks could experience another bout of credit defaults, especially if the economy continues to slow.
Fitch Ratings reckons that the banks could incur losses on total loans of 5% to 6%, if not more, if the economy weakens badly, and Standard & Poor’s has also stated its worries about deterioration in asset quality.