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China loan bubble may pop in coming months

(ATF) China’s banking regulator has warned domestic banks to prepare for a wave of non-performing loans caused by the economic impact of the coronavirus epidemic.

The China Banking and Insurance Regulatory Commission said banks should be prepare for a substantial increase in non-performing loans, noting that the deterioration in the quality of ‘assets’ or loans held by some small and medium-sized financial institutions is accelerating.

It warned that the profit growth rate of some banks will slow down this year, and the profit of some banks will decline.

If the non-performing loan provision coverage ratio of banking institutions reaches the minimum standard of 100% (some banks have not completed the provision), then the profit of the entire banking sector will be reduced by more than 350 billion yuan.

According to the CBIRC’s data, China’s commercial banks made a total profit of 2 trillion yuan in 2019.

But this year will be very different. The commission said that, as of the end of June, the balance of non-performing loans in China’s banks had reached 3.6 trillion yuan, and the non-performing loan ratio has risen to 2.1%, which is 0.08 percentage points higher than the beginning of the year.

‘Figures don’t reflect reality’

However, analysts from Marginal Lab said that since the authorities have allowed the deferred payment of principal and interest for small business loans since the beginning of this year, the NPL ratio does not actually reflect the true level.

This echoes a Guosen Securities analysis, which said: “Due to the delayed loan repayment policy, the epidemic has hardly any impact on the asset quality of banks in the first and second quarters. The growth of the non-performing loan rate in the next quarter will be more significant.”

Previously, the Chinese government called on financial institutions across the country to sacrifice 1.5 trillion yuan in profits this year, by reducing loan interest rates, lowering fees, delaying loan repayments, and providing more unsecured loans to help small businesses deal with the economic impact of the virus.

Previously, a model of UBS Group showed that if China’s economic growth rate is 4.8% in 2020, then the profit of the banking industry will fall by 39% this year.

The Chinese government also allows local governments to use the proceeds of special bonds to replenish capital for small and medium banks.

The banking commission’s announcement also stated that some funds from bond issuances had flowed illegally into the real estate and stock markets.

It warned of the risks of shadow banking, but did not elaborate.

The statement proposed strengthening the supervision of capital flows and cracking down on speculation in the financial sector to prevent the risk of asset bubbles.

Chris Gill

With over 30 years reporting on China, Gill offers a daily digest of what is happening in the PRC.

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