In another sign that China’s slump is serious enough to evoke crisis responses from the officialdom, banking officials there announced that they were relaxing rules on bank bad debt ratios. The objective is to encourage banks to continue to extend credit to borrowers experiencing short-term difficulties who have viable businesses. The concern, of course, is that banks will have trouble determining who will pull through, and could easily wind up with a lot of dud loans.
From Bloomberg:
The China Banking Regulatory Commission will drop its target of reducing the balance and ratio of bad loans after five years of declines, and instead aim to prevent a “massive and rapid rebound” in soured debts, Chairman Liu Mingkang said in Beijing today….
Looser requirements may fuel concerns about a surge in bad loans, four years after China finished a cleanup of its banking system that cost more than $500 billion. Lenders will likely face weakening asset quality, rising defaults and “significant” constraints on profits in 2009, Standard & Poor’s said Jan. 7.
“What we’re concerned about is whether banks will, under government interference, boost lending without properly recognizing the risks,” said Liao Qiang, the rating company’s Beijing-based analyst, in an interview. “Governments tend to relax prudential regulatory requirements in difficult times. The key is how banks” react.
Measures to boost credit include allowing banks to lend to businesses afflicted by “temporary” financial woes due to the global recession but with sound fundamentals, Liu said. Lenders can also “restructure” loans and “scientifically” adjust the types and maturities of debt, and the regulator will support the sale and securitization of loans, he said without elaborating….
The regulator will have “reasonable tolerance” for rising bad loans, Liu said. Shrinking corporate profits and interference by local governments have “seriously” reduced borrowers’ willingness to repay debts, he added. Banks cut their average bad-loan ratio to 5.49 percent at the end of September, from 6.3 percent six months earlier.
Still, the CBRC will “strictly” ban companies from taking up new project loans to repay existing ones, and prohibit bundling of non-performing assets into securities, according to the transcript. Banks aren’t allowed lend to production projects before the investors get relevant approvals, Liu said.
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They already have plenty of bad debt in “off balance sheet” units.
D
How can anyone expect that a country that pegged its currency to the dollar would avoid the risky behaviour of the dollar-zone?
Is is better to have an over-indebted industrial sector than over-indebted household? I have no clue.
In both cases, the system is utterly inefficient and makes no money back to creditors.
Savers beware… BoC is on a long-term gold-revival scheme, along with Bernanke and co. How can anyone wonder why the credit system is broken.
Credit implies an effective savings system… It is “currency policy 101”. Any alternative implies heavy use of the printing press.
I expect a run on tangible assets before the end of the year. IMHO this one may have serious geopolitical consequences…
On the long run, the chances are quite high that these reckless behaviours draw the political entities that issue them (US federal government and China central power) into bankruptcy…
I have no doubt that both China and the USA can survive feeble government entities. But I feel that this was worth mentioning.
hmm, guess that ties in with the NPL boom likely to be seen in the next couple of years, but what’s new?
NPL? WTF?
Link:
http://acronyms.thefreedictionary.com/NPL
Which is the right one ? National Paintball League? Nuclear Pumped Laser?
The third strategy is to create an emergency fund. One can do this by saving at least 6 month’s income worth of money. This money will prepare you for any emergency expenses such as job interruption, repairs, hospitalization, and more. The fourth strategy is to ensure proper protection through insurances. The fifth and last strategy is to build long term asset accumulation by investing in stocks, mutual funds, etc. Again, there are a lot of people who want to attain financial freedom.
NPL, the next bubble. Profit from it.
Anonymous above: NPL = non-performing loans.
I don’t really see this as some ominous relaxation of “rules”… no more ominous at least than changing bank reserve requirements in any other context.
Bottom line is that China needs banks to make loans to keep their economy going, something that is not happening in the west, and they will make sure it happens. One advantage of Communism.
i think that corruption–the cause of many bad loans in China in the past–has not ebbed in the years since the cleanup. Friends will get the loans and bad debt will once again rear its ugly head, probably more than expected.
FYI..just got back from 3 weeks in Guangzhou. Couldn’t see much in terms of signs of a slowdown–maybe a few fewer cranes than usual but many building were still on the rise. I did hear from residents that housing prices were down 20-30% from the peak. I was there to visit in-laws and don’t speak the language, so it’s hard to get much info.
it is fortunate that china is able to weather any storm as it has the where – with-all to do it ( it actually has a reserve ), so it is able to do whatever it pleases
the USA on the other had is using chinas reserve to covers its problems—
the USA is in the $hitter – and the only place for it to go is down the BLACK TUNNEL