China on high alert over bad debt

CBRC bans restructures and repo agreements on non-performing loans as total corporate debt burden hits 10-year high

China’s banks and asset-management companies (AMCs) have been prohibited from striking repurchase agreements or other deals that would either transfer risk, or alter the transaction structures, of non-performing loans (NPLs).

According to paperwork seen by news agency Reuters, the edict from the China Banking Regulatory Commission (CBRC) also warns companies with bad debt that they should expect more rigorous inspections of their onsite and offsite business assets from the agency’s personnel.

The measures come as China grapples with total NPL exposure of ¥1.27 trillion recorded for the fourth quarter of 2015: a 10-year high. In its official announcement of the NPL debt burden, published earlier this year, the CBRC portrayed the quality of credit assets as “generally under control”, on the basis that the outstanding balance on performing loans stood at ¥74.9 trillion – 72 trillion of which applied to standard loans (under China’s regulatory regime, commercial banks must place debts into the risk-based categories of standard, special mention, secondary, doubtful and loss loans).

Even with that spin, though, the total NPL debt for Q4 2015 still marks a rise of ¥88.1bn on the previous quarter.

The CBRC document reportedly orders AMCs “not to provide any channels for banks to avoid regulatory supervision over asset quality”, and adds that they “must not use unreasonable extension, restructuring, internal transfer or roll-over [methods] as means to conceal risks”.

Reuters’ uncovering of the document follows the 16 March publication of data from market-intelligence specialists Coface, indicating that overdue credit payments are affecting some 80% of corporates in China.

Its analysis stated: “Chinese firms that are suffering from overcapacity and low profits now have a higher probability of default, since the government has decided to tackle overcapacity and ‘zombie’ companies.

“Even though credit growth is slowing, private debt is continuing to grow faster than GDP. China has not yet entered a deleveraging process and the risks are increasing. Outstanding debt held by the private non-financial sector reached 201% of GDP in June 2015, compared with 114% in June 2008 and 176% in June 2013.”

Coface economist Charlie Carré explained: “The government’s strategy is ambiguous and the authorities are caught between two objectives: they need to find a balance between, on one side, supporting GDP growth to prevent a ‘hard landing’ and to protect jobs, while on the other side managing the debt-bubble risk.

“At the same time, businesses in China are facing increasing challenges, such as high leverage with steep costs of financing (despite monetary easing), low profitability (driven by large overcapacities in certain sectors) and volatility on the FX and stock markets.”

He added: “Monetary easing measures have not been very effective in 2015 and [we expect] more stimulus packages in 2016, as the Chinese authorities endeavour to avoid a hard landing.”

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