Bad debt among small Chinese banks has grown quickly; the situation must be corrected soon to avoid further problems.
The Chinese National Audit Office has released figures showing that among small banks, levels of bad debt are as high as 40%.
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The Henan province in central China is the most concerning region for Beijing: 42 local banks there had passed the ‘warning line’ with toxic debt levels over 5%. 12 banks have rates above 20% and a handful of banks reaching a figure of 40%.
President Xi Jinping has had his eye on China’s developing debt problem for some time and has taken steps to improve the quality of written bank loans. However, despite these efforts, whenever growth slows Beijing tends to loosen its grip on loan regulation to fire up the economy, causing the amount of toxic loans to increase again.
Should Beijing prop up or let down bankrupt banks
Beijing must decide whether to let these rotten banks collapse or save them, pushing forward further financial reform. But it has to fix this problem quickly because a huge $258bn in bad debt is believed to be sloshing round the financial system.
Chinese officials have been worryingly blasé about the issue, believing these banks to not be systematically crucial.
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By GlobalDataGiven that China’s 2019 growth levels have been the lowest since 1990, China can’t slow down lending too heavily for fear of further slowing growth. But it also can’t let these small banks collapse either, because it may result in a domino effect of defaults which could cause untold financial instability.
China’s never ending stimulus package
China has been operating a policy of continuing stimulus since the last financial crisis in 2008. The country has been happy to allow its corporate sector to accumulate high levels of debt and its banks to write risky loans in order to produce and maintain high levels of growth.
Problematically, returns on loans have started to diminish and numbers of businesses defaulting on loans have skyrocketed, making the operations of some banks unsustainable.
China has been working to reduce the amount of risky loans that are being written by banks, but in many cases Beijing’s refusal to let toxic debt riddled banks collapse has taken the pressure off lenders to perform more stringent checks on their clients.
Banks are continuing to write poor quality loans and traditionally, economies that rely on significant financial stimulus too heavily will experience severe slowdowns as financial risks emerge.
