China admits that bad debts have soared by hundreds of billions of dollars: Scary pressure "suffocating" the financial system?

China's bad debt rises sharply

The statement marks a major risk to the banking system in the world's second-largest economy. This total bad debt recorded a sharp increase from the previous year's 2,300 billion yuan, and the number of bad debts is forecast to increase even higher next year.

Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission (CBIRC), told Xinhua that the rise in bad debts — insolvent or near-insolvent debts — will put enormous pressure onbanks, especially small banks and regional banks.

"Given that there are many loans that will be due [in 2020], some problems will only emerge next year," Guo said, adding that the trend of bad debts is "inevitable" as the business of many businesses has been hit hard by the pandemic COVID-19.

Guo's warning comes at a time when many of the country's small banks are facing an asset inventory after years of indiscriminate lending, not to mention cases of financial fraud and embezzlement corruption.

Meanwhile, Guo said, Chinese banks have improved their lending structures and increased lending in the manufacturing, infrastructure, technology and small business sectors.

Guo added that Chinese banks have now received instructions to increase support for small businesses. In addition, he said he would encourage banks to invest more in corporate bonds.

Potential bad debts weigh on Chinese banks

According to official statistics from the CBIRC, China is currently one of the countries that maintains the lowest bad debt ratio in the world. The NPL ratio at commercial banks increased by 0.03% in the second quarter to 1.94% at the end of June.

However, potential bad debts, when accumulated, will quickly take up all bank profits and erode the principal. According to government data, in the first half of this year, the total profit of banks in the country of billions fell for the first time in more than a decade, falling 9.4% to 1 trillion yuan.

Baoshang Bank, based in the city of Baotou in the Inner Mongolia Autonomous Region, has not published any annual reports since 2016 and the local government has decided to take over the bank in May 2019. After more than a year of checking the books, the Central Bank of China found that the bank's financial data was falsified and the bank had to file for bankruptcy.

The incident marks the first bank failure in China in more than two decades. In internal transactions alone, Baoshang provided Tomorrow Group, owned by tycoon Xiao Jianhua, which is also the bank's watchdog, with loans worth up to 156 billion yuan (22.5 billion USD). All loans have become "bad debts", according to information from a report released by the central bank's takeover chief, Zhou Xuedong.

 

A report by Caixin (China) said that as of the end of 2017, Baoshang Bank had 556 billion yuan in assets and bad debts of 290 billion yuan (Photo: Reuters)

The Chinese government also joined in guaranteeing Hengfeng Bank last year. This year, at least four bank misconduct cases have been reported to China's central bank, all of which occurred at small regional credit companies.

According to China's official statistics, the NPL ratio at rural commercial banks is 4.22%. The merger of small banks, often managed by local governments, is becoming more and more common.

For example, in June, the Panzhihua Municipal Commercial Bank and the Liangshan District Commercial Bank in Sichuan province announced that they would merge into a new bank.

5 local banks in northern China's Shanxi Province include Jinzhong Bank, Jincheng Bank, Yangquan City Commercial Bank, Changzhi Bank and Datong Bank, are also expected to merge to form a new bank. According to the bank's announcement announced last week, the merger proposal will be discussed at an interim shareholder meeting at the end of August.

However, there are still many doubts about China's small banking system. Raymond Yeung, chief China economist at ANZ Bank, said small banks, often owned by local governments, face particularly high risks when paying for key projects by local governments and state-owned enterprises.

"In general, larger banks have the ability to diversify risk... But what is more important is to improve asset quality through corporate restructuring and disposal of non-performing assets. " Mr. Yeung said.

In an interview with Xinhua, Guo Shuqing pledged to supplement the registered capital of small banks, expand the scope of capital to handle risks and improve corporate governance.

Guo added, "The reform process of small and medium-sized banks is key to improving the stability and efficiency of China's financial system."

Source: Cafebiz