China’s $600b sub­prime cri­sis is al­ready here

The Pak Banker - - OPINION - Christo­pher Langner

SORRY, Kyle Bass, you're a bit late to the game. The debt prob­lem in China has al­ready reached the pro­por­tions of the US sub­prime mort­gage de­ba­cle. Don't worry, though: Chi­nese au­thor­i­ties are on the case-dis­cussing re­duc­ing the re­quired cov­er­age for bad loans so that banks can keep book­ing prof­its and lend­ing. In­clud­ing "spe­cial-men­tion" loans, which are those show­ing signs of fu­ture re­pay­ment risk, the in­dus­try's to­tal trou­bled ad­vances swelled to 4.2 tril­lion yuan ($645 bil­lion) as of De­cem­ber, rep­re­sent­ing 5.46% of to­tal lend­ing. That num­ber is al­ready higher than the $600 bil­lion to­tal sub­prime mort­gages in the US as of 2006, just be­fore that as­set class top­pled the world into the worst fi­nan­cial cri­sis since 1929.

The amount of loans classed as non­per­form­ing at Chi­nese com­mer­cial banks jumped 51% from a year ear­lier to 1.27 tril­lion yuan by De­cem­ber, the high­est level since June 2006, data from the China Bank­ing Reg­u­la­tory Com­mis­sion showed on Mon­day. The ra­tio of soured debt climbed to 1.67% from 1.25%, while the in­dus­try's bad-loan cov­er­age ra­tio, a mea­sure of its abil­ity to ab­sorb po­ten­tial losses, weak­ened to 181% from more than 200% a year ear­lier. The news looks to have scared Chi­nese au­thor­i­ties into re­act­ing. Note that they aren't curb­ing the abil­ity of Chi­nese banks to lend or ask­ing them to write off bad credit. In­stead they're con­sid­er­ing putting aside checks al­ready in place that are aimed at en­sur­ing the health of the fi­nan­cial sys­tem: by re­duc­ing the ra­tio of pro­vi­sions that banks must set aside for bad debt, cur­rently set at a min­i­mum 150%, asBloomberg News re­ported on Tues­day. Per­haps, they're hop­ing banks will lend even more if they ease the rules. That's one way to keep the ra­tio of non­per­form­ing loans un­der con­trol. As the de­nom­i­na­tor in­creases the ra­tio re­mains steady or even drops. The ab­so­lute num­ber of bad loans, how­ever, keeps swelling. Guess what? Banks are lend­ing more. China's new yuan loans jumpedto a record 2.51 tril­lion yuan in Jan­uary, the Peo­ple's Bank of China re­ported on Tues­day, way above the 1.9 tril­lion yuan me­dian es­ti­mate in a Bloomberg News­sur­vey. Ag­gre­gate fi­nanc­ing, the broad­est mea­sure of new credit, also rose to a record, at 3.42 tril­lion yuan. China's bad loans have grown 256% in six years even as their ra­tio to to­tal lend­ing dropped. The true amount of debt that isn't be­ing re­paid is open for de­bate. One ex­am­ple of how the data can be dis­torted: Banks are mak­ing in­creas­ing use of their more opaque re­ceiv­ables ac­counts to mask loans and po­ten­tial losses, as Bloomberg News re­ports to­day.

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