China NPL losses in 55% surge, says CBRC

Big Five banks write off loans worth a total $40bn between January and September, regulator reveals

Losses on non-performing loans (NPLs) at China’s biggest banks surged by 54.6% in the first nine months of the year, according to official data.

Figures released by the China Banking Regulatory Commission (CBRC) show that in that time, write-offs among the so-called ‘Big Five’ institutions rocketed to ¥274bn, equivalent to $40bn.

Those losses stemmed largely from corporate debt.

Players in the Big Five elite are the Bank of China, China Construction Bank, Agricultural Bank of China, Industrial and Commercial Bank of China and Bank of Communications.

Industry observers have attributed the write-offs to increased government pressure on banks to act on the corporate NPL issue, which has dogged China’s financial system throughout 2016.

For example, as The Treasurer reported in the summer, David Lipton – first deputy director of the International Monetary Fund – openly criticised China’s corporate debt levels which then stood at 145% of GDP: “very high by any measure”, in his view.

“In a setting of slower economic growth,” Lipton stressed, “the combination of declining earnings and rising indebtedness is undermining the ability of companies to pay suppliers or service their debts. Banks are holding more and more NPLs.”

Mindful of the criticism that the government has faced, and how it reflects upon them, China’s major banks have been letting particularly problematic loans go rather than attempt to sustain the unsustainable.

However, the frequency of their write-offs has ensured that Big Five losses are now growing at a faster rate than profits.

Against the backdrop of that concerning development, Agricultural Bank of China has distinguished itself with an all-time, industry-worst NPL ratio of almost 2.39%.

The CBRC published its figures just days after making a legal amendment that will have a significant effect on the ability of local provinces to deal with their bad corporate debts.

Up until the weekend of 22 October, when the amendment was circulated, provinces were restricted to just one, specialist bad-debt management entity each.

However, the regulatory change has lifted those restrictions, freeing provinces to ramp up their bad-debt management infrastructures by allowing new service providers to enter the fray.

According to The Wall Street Journal, which saw a copy of the amendment, the CBRC said that its measure would boost “the number of avenues for financial companies to dispose of bad loans, and to develop local-government asset management companies”.

A Reuters source subsequenly said that the CBRC loosened the restrictions “because they need a platform to follow through new policies” – such as a long-planned debt-for-equity swap that the government views as crucial to stamping out corporate NPLs.

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