The Trouble with China’s Troubled-Asset Relief

BEIJING – Back in 2009, in the midst of the global recession, China’s government launched a massive economic-stimulus package that bolstered GDP growth by fueling a surge in bank lending. But now it is becoming increasingly apparent to policymakers and investors that easy credit and lopsided policies have generated significant risk for China’s banking system. Indeed, amid rising concern about banks’ troubled assets, defusing financial risk has become the authorities’ central goal.

According to the China Banking Regulatory Commission, commercial banks’ non-performing loans (NPLs) at the end of June totaled ¥539.5 billion ($88.1 billion) – nearly 1% of outstanding loans. The loan loss reserve-fund balance was ¥1.5 trillion (up 19% from the previous quarter), the provision-coverage ratio was 292.5%, and the loan ratio was 2.8%.

Government-backed loans amounted to ¥9.7 trillion, representing a 6.2% increase since last quarter – nine percentage points lower than the average growth rate for all categories of banking loans. And the balance of wealth-management products stood at ¥9.1 trillion, of which non-standard credit assets accounted for ¥2.8 trillion.

According to the official numbers, NPLs do not actually account for a very high share of total assets, and the NPL ratio (0.96%) is manageable. The problem is that most of China’s NPLs are off-balance-sheet loans, so the NPL ratio may be much higher – and China’s financial sector much riskier – than anyone realizes.