BREAKINGVIEWS - China’s softening on bad loans looks complacent

A staffer poses with 2015 edition of the 100 renminbi notes at the Bank of China Tower in Hong Kong, China November 12, 2015. REUTERS/Bobby Yip

HONG KONG (Reuters Breakingviews) - China’s bank regulator is easing buffers required for problem loans, according to media reports. This is another incremental move to offset a crackdown on shadow banking. More cash for lending will boost bank profits, especially at smaller institutions – or make it easier to bring off-balance-sheet assets back aboard. Even so, Beijing is relaxing too quickly about bad debt.

Sources told Reuters the China Banking Regulatory Commission would lower non-performing loan provision ratios to as low as 120 percent for banks with healthy books, down from 150 percent. Lowering them makes sense for the “big four” state banks, who concentrate on lending to state-owned enterprises anyway, since that debt is backstopped by the state. In any case, Industrial and Commercial Bank of China has been openly flouting the rule for several quarters now.

Officials have been pushing bankers to get better at identifying NPLs, more honest about reporting them, and quicker at resolving them. A horde of distressed debt investors has lent a hand, buying portfolios from the banks. So while the NPL ratio has remained flat at around 1.7 percent of overall loans since 2016, it has probably become more accurate.

Yet the gap between official NPL figures - $270 billion at the end of 2017 - and independent estimates remains extremely wide, thanks to many duff loans being hidden in other categories. Many analysts believe the actual bad-debt ratio is closer to 15 percent, and predict recapitalization will be required.

Nor is credit contracting anyway. New loans hit a record 2.9 trillion yuan ($458 billion) in January. The government wants total social financing – a homegrown measure of credit provision - to rise around 12 percent this year, faster than the implicit nominal economic growth target of about 9.5 percent.

The prospects for borrowers are weakening, too. Trade tensions are putting exports at risk. Producer pricing power has been weakening since October. And even strategic sectors like artificial intelligence are swamped with capital, while household debt swells quickly.

Reducing the balance-sheet penalty paid for NPLs may encourage loan officers to report them more honestly. It is less likely to discourage them from engaging in more sloppy lending.


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