China's NPL worries
This update is about China’s rising non-performing loans (NPL).
Since the global financial crisis, China has shown good growth in GDP which was fuelled further by a surge in easy credit. Total debt rose sharply, from 125% of GDP in 2008 to 215% in 2012. A lot of that money has gone into projects but these projects have not generated good returns. Officially, China’s banks report a non-performing loan ratio of less than 1%. But in reality, the risk may be much higher. According to the China Banking Regulatory Commission, commercial banks’ NPLs at the end of June totalled ¥539.5 billion. That is about 1 per cent of outstanding loans. The loan loss reserve fund balance was ¥1.5 trillion (up 19 per cent from the previous quarter), the provision-coverage ratio was 292.5 per cent, and the loan ratio was 2.8 per cent. Government-backed loans amounted to ¥9.7 trillion, representing a 6.2 per cent increase since last quarter, which is 9% points lower than the average growth rate for all categories of banking loans. And the balance of wealth-management products stood at ¥9.1 trillion, of which non-standard credit assets accounted for ¥2.8 trillion. However, since the NPLs are off-balance sheet, the financial sector may be at higher risk than what is visible. This could have serious implications.
Local government debt has swollen to 17.9 trillion yuan by the middle of last year, nearly 70 per cent more than at the end of 2010, with the bulk of credit coming from the shadow banking system. The National Development and Reform Commission (or, NDRC) of China is in charge of controlling local debt, which must continue to remain low through regulatory oversight. The People’s Bank of China has announced its intentions to promote financial reform, improve financial service and management to support the economic development, and adjust the economic structure. The central bank has announced an addition of 70 billion yuan bills into China’s market, a change in asset backed security guidelines, and that banks would soon be giving certificates of deposits in order to aid interest-rate reforms.
However the government agenda doesn’t specifically address NPL issues.