Are you sure?

Chinese banks face $228bn default risk

Chinese banks are facing serious default risks on more than Rmb1,1550 billion ($228 billion) in loans they have lent to local governments across the country, according to senior Chinese officials. The country’s commercial banks have identified about one-fifth of the Rmb7,700 billion lent to local government financing vehicles, which are mostly used to fund regional infrastructure projects.

A senior official from the China Banking Regulatory Commission (CBRC) told the Financial Times all of these loans might not necessarily go bad but that the country’s non-performing loan ratio will almost certainly “increase slightly” at the end of the year.

The CBRC will end its inspection of banks’ problem loans to local governments by the end of this year, the FT reported, adding that investigation will cover problem loans went to property developers, mortgage borrowers and companies operating in industries in which the government is trying to curb overcapacity.

The banks have been ordered to increase collateral, ensure loans are covered by creditworthy guarantors, and link individual loans to specific projects, the FT wrote.

“The central government, ministry of finance, central bank and CBRC are all paying a lot of attention to these loans and have been taking measures to control these risks since last year,” the CBRC official said.

Non-performing loans accounted to 50% of all loans in Chine a decade ago, but following reforms, the average NPL ratio stood at 1.3% at the end of June, according to the FT. Chinese banks lent a record Rmb9,600 billion last year – more than doubling from the previous year – on orders from Beijing to boost economic growth in the midst of the global crisis.

However, top Chinese bankers and regulators have repeatedly warned since the beginning of 2010 that many of these loans will eventually go bad. CBRC chairman Liu Mingkang drew attention to the risks in government-backed financing vehicles, the property industry and sectors with overcapacity problems.

Warnings were not in vain: the flow of new loans has appeared to slow down recently. According to figures from China’s central bank headline growth slowed to 10.3% in the second quarter of 2010 from 11.9% in the first quarter and loans to property developers dropped 62% from the first quarter to Rmb121.6 billion in the second quarter.

But analysts say that in spite of the apparent success, there are plenty room to worry. “The apparent success of the clampdown on lending actually disguises a worrying new trend that involves banks co-operating with lightly regulated trust companies to keep loans off their books,” wrote the FT.

“The surge of banks’ off-balance-sheet loans via trust funds [those not counted as bank loans] in the second quarter of 2010 unveiled the true story: to avoid using their loan quota, banks worked with trust companies to sell investment product to retail investors,” Du Jinsong, an analyst at Credit Suisse told the FT. The CBRC ordered a stop to this type of lending at the start of the month. (BBJ)