Chinese banks may be burdened with hidden bad loans

If the bank of Jinzhou in northeast China China, showed signs of trouble earlier this year, with state media suggesting billionaire Li Hejun was to blame. Tycoon from industry solar panels, Li was once the richest man in China. His company was known for maintaining strong ties with the bank. And shortly after news of his arrest spread, Bank of Jinzhou suspended trading in its shares and told investors it was restructuring its operations.

Ironically, the bank’s finances looked in good shape. The bank’s overall level of arrears was low in the first half of 2022, the latest period for which detailed information is available. Although the alarming figure stands out – more than 50% of loans to private companies had late payments – this type of loans accounted for only 1% of the total amount. Small and micro business loans, which make up about half of the bank’s loan portfolio, looked normal, only 3% worsened.

But was that the full story? In theory, there is no significant difference between personal business loans and small and micro business loans, says Jason Bedford, a veteran financial industry analyst. Both are used in similar ways and should present the same risk. However, there is a significant difference in practice: loans to small and micro businesses are still subject to the Covid-era moratorium, which allows banks to avoid recognition by default in loans. Therefore, it is possible that a large part of Jinzhou Bank’s active loans are unpaid and unacknowledged debts. This year, the bank said almost nothing about his condition.

If unpaid and hidden debts like these are troubling Jinzhou Bank, they may well be troubling other institutions as well. Which is worrying because China’s finances are already a mess. Local governments are struggling to pay off at least 65 trillion yuan (US$9 trillion) in loans that are off the books. Many of the country’s major developers have already defaulted on offshore bonds and owe trillions of yuan for unbuilt housing for local residents. The largest Chinese fund managers began to default on payments to investors. Given that the type of hidden debt on Bank of Jinzhou’s balance sheet has so far received little attention, the institution’s difficulties should serve as a warning.

China is facing problems in the real estate market, which may extend to banks photo: Thomas Peter/REUTERS

Small business lending problems started with Covid-19. After China’s shutdown, the central bank imposed a moratorium on loans to small and micro businesses until June 2020 to stem a wave of defaults. In less than three months, authorities estimate that 700 billion yuan in debt installment payments have been delayed. Since then, the moratorium has been extended several times, with officials citing the lingering impact of Covid. There is no estimate of the amount of unpaid loans, and banks will be required to disclose this data only next year.

The moratorium also coincided with another government initiative. To stimulate the economy, the central government pressured banks to extend loan repayment terms for smaller companies and at the lowest possible interest rates. Although such a policy had been tried for years, banks resisted, preferring to lend to larger companies, often state-owned, with which they already had relationships. But this time the policy worked. The financial sector surveillance operation that culminated in the arrest last year of the president of one of China’s largest commercial banks has made the directors of financial institutions more willing to comply with official orders.

Continues after commercial

As a result, at the beginning of the year, about 28% of all loans in China were issued to small and micro enterprises, compared to 24% at the end of 2019. Many of these loans are simply the recovery of old unpaid debts. It’s common knowledge that small businesses are struggling during a pandemic. Despite this, the growth of overdue loans almost did not happen, notes Alicia García Herrera from Natixis Bank.

Another result was what some perceive as a catastrophic misvaluation of assets. Small companies are generally considered to be more risky, but small and micro business loans are nevertheless offered at very low interest rates. Banks are offering credit at an average of 4% per annum, up from 6% in 2019. Worse, the recent increase in long-term deposits, which are paid out at higher rates, means banks’ margins are further squeezed.

Few banks have given clues about the number of overdue loan payments on their balance sheets. Minsheng Bank, one of China’s largest, said in its 2022 half-year report that it issued 212 billion yuan of extended loans and revised payments in the past six months, equivalent to about 9% of total credit cards. Since then, the bank has refused to disclose such information. The Central Bank provides banks with funds that can be used to support certain sectors of the economy. In a recent report, the agency said it provided 2.7 trillion yuan in loans to small businesses in the first half of this year.

Any moratorium on loan payments involves a gamble: the grace period will allow struggling businesses to recover from the shock. The original decision may have saved tens of thousands of companies and even some banks from bankruptcy. But now the impact of the accumulated debt – however great it may be – depends on China’s economic condition in the coming months. Although manufacturing purchasing managers’ indices show that the outlook for large companies has improved slightly, cuts continue for small and medium-sized companies. The economic hangover of the Covid era continues. And now, perhaps, it is about to intensify. / TRANSLATION OF AUGUST KALILUS

Check Also

Unilever reveals plans to return to growth and new…

Rozani RojaOctober 27, 2023 – 6:00 a.m In particular, the company’s food and ice cream …

Leave a Reply

Your email address will not be published. Required fields are marked *