(Refiles to fix word in paragraph 22)
SHANGHAI, April 30 A stress test by China's
central bank showed the banking system can weather big increases
in bad debts or a sharp economic slowdown, but some analysts
were sceptical about the findings aimed at shoring up investor
Concern about huge growth in Chinese corporate debt since
the global financial crisis and the risk of defaults has
intensified this year as growth slows and authorities allow
markets to play a bigger role in deciding winners and losers.
"The results of the stress test showed that the asset
quality and capital adequacy of China's commercial banks is
relatively high," the People's Bank of China (PBOC) said in its
annual financial stability report released on Tuesday.
The central bank carried out stress tests at the end of last
year for events such as a 400 percent rise in non-performing
loans (NPLs), increases in bond yields, large changes in the
yuan's exchange rate, and economic growth slowing to 4 percent.
Another worst-case scenario tested was a 15 percentage point
rise in non-performing loans of local governments and industries
with excess capacity.
The tests covered 17 domestic banks that are considered
systemically important and account for 61 percent of assets.
"Under light, middle and heavy stress scenarios, the banking
system's overall capital adequacy would remain at a relatively
high level; even the most serious scenario would not see the
capital adequacy ratio fall below 10.5 percent," the report
That would be a fall of about 1.5 percentage points in the
current level of the ratio.
However, the PBOC did say that under the worst-case
scenario, three banks would fail to meet liquidity ratio
requirements. It did not name those banks, nor did it release
any results for individual banks.
Commercial banks are required to keep their liquidity ratios
at 25 percent or higher.
Concern about Chinese corporate debt has intensified this
year as the economy loses some momentum and after Shanghai
Chaori Solar Energy Science and Technology became the first
Chinese issuer to default on a public domestic bond in March.
Chaori's unprecedented default signalled to the market that
local governments may no longer bail out troubled firms, forcing
market participants to reassess credit risk.
The stress tests did not investigate the hundreds of smaller
commercial and rural banks. These smaller lenders are seen as
more vulnerable to slowing growth and rising bad debts, and
their problems draw great media attention, but they are not
considered to pose a broad systemic threat. [ID: nL4N0MO15S]
The China Banking Regulatory Commission (CBRC) plans to
conduct regional and national stress tests after banks saw a
spike in bad loans last year, official media reported earlier
Chinese banks' NPL ratio rose to 1.0 percent at the end of
December, its highest level in two years, the CBRC reported in
February. But many analysts believe true NPL ratio is higher as
banks can disguise bad loans by rolling them over.
The banking regulator has conducted stress tests before, but
analysts are suspicious about the reliability of the findings
given such test may fail to reflect the real economic changes.
For example, China may see widespread job losses if the
country's economic growth dips to 4 percent, which could in turn
lead to rising defaults among home buyers, said Lu Zhengwei,
chief economist at Industrial Bank in Shanghai.
"The results from the stress test are relatively optimistic.
The tests are meaningful but we must pay attention to possible
risks from dynamic changes," said Lu.
The government aims for 7.5 percent annual growth this year,
and China's Premier Li Keqiang has said that the economy must
grow 7.2 percent annually to create 10 million jobs a year.
Bankers and analysts expect bad loans to rise further this
year as economic growth slows and banks deal with the aftermath
of the huge lending binge that policymakers unleashed to soften
the impact of the global financial crisis in 2008.
The economy grew 7.4 percent in the first quarter but
China's resource-dependent and manufacturing-heavy provinces
suffered the sharpest growth slowdown in the first quarter, with
annual growth in Hebei province, the nation's top steel
producer, tumbled to 4.2 percent in the first quarter.
Chinese policymakers are pushing for a deleveraging process
to cope with the hangover of the lending binge under a huge
stimulus to counter the impact of the global crisis in 2008-09.
Banks have been told to curb lending to local government
financial vehicles and industries facing overcapacity, forcing
them to turn to shadow financing channels, such as trust loans.
Nicholas Borst at Peterson Institute for International
Economics, believe that a 50 percent drop in housing prices
could bring the NPL ratio to 6.6 percent, as real estate loans
account for a fifth of the total loan book of commercial banks.
"A sharp correction in real estate prices would put many of
these loans into default," he said in a research report, adding
that the bulk of the defaults would likely come from highly
leveraged property developers, rather than households.
"This would be a painful shock to the banking system, but
manageable given high capital buffers."
(Reporting by Pete Sweeney; Additional reporting by Chen Yixin,
Kevin Yao and the Shanghai Newsroom; Editing by John Mair & Kim