When Will China’s Debt Problem Detonate?

Bad loans

Another dimension of the debt problem is the amount of non-performing loans (NPLs) in the Chinese banking system. According to rating agency Fitch, the amount of NPLs is ten times the official figure or somewhere between 15% and 21% of outstanding credit, much higher than the official figure (1.8%).

That is in the same order of magnitude as Italy’s bad loans. What would it cost to clean up? Here is CNBC:

Solving China’s bad loan problem would result in a capital shortfall of 7.4 trillion-13.6 trillion yuan ($1.1-2.1 trillion), equivalent to around 11-20 percent of China’s economy, Fitch said.

This would be much higher than the damage inflicted by the financial crisis to UK or US financial system, it would be more in the order of the trauma suffered by Ireland, Greece or Cyprus.

Then there is the WSJ arguing that Chinese banks are hiding many of these bad loans by relabeling them as ‘investment receivables,’ to the tune of $2 trillion, or 20% of outstanding loans (up from 6% in 2011):

The IMF considers the rapid rise of these wealth management products itself a considerable risk – from CKGSB Knowledge (the article provides a terrific introduction to these WMPs):

This August, the International Monetary Fund issued warnings on China’s credit boom risk, specifically calling out wealth management products as a key part of the problem. China’s overall debt level has risen from about 150% in 2008 to 240% of GDP today, and according to IMF’s statement, the state banks are repackaging at-risk loans into “investments,” which cosmetically improves their balance sheets, but does not fix the core problem-high levels of non-performing loans.

Basically, these products are similar to special investment vehicles, the use of which was widespread in the west before the financial crisis. They constitute a hidden second balance sheet for financial institutions.


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