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There’s A ‘$2 Trillion Black Hole’ In China

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Ryan Pickrell China/Asia Pacific Reporter
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China’s already-massive pile of bad loans may be 10 times larger than Chinese officials say, a Fitch Ratings report revealed Thursday.

China reports that as of the end of June, non-performing loans (NPL) provided by commercial banks accounted for only 1.8 percent of China’s loans. Renowned international ratings agency Fitch argues that NPLs could actually account for 15-21 percent of China’s commercial loans.

The China Banking Regulatory Commission revealed in May that Chinese NPLs surged to an 11-year-high of roughly 1.75 percent of the country’s commercial bank loans. These figures are alarming as is, but China’s NPL situation may be so much worse.

In response to the global financial crisis, China began relying heavily on credit to drive growth. The result was a major credit boom. China continued to rely on credit-driven development after its annual growth figures dropped to around 7 percent as part of the “new normal.”

Right now, China’s debt stands at around 255 percent of its gross domestic product (GDP), and its credit-to-GDP gap is 30.1. The Bank of International Settlements asserts that anything over 10 is definitely cause for concern.

The state has said that it is steering the country away from credit-driven growth, but the evidence suggests that it is still using credit to meet its GDP growth targets, the Fitch report explained. “There are already signs of stress, most obviously in the increased frequency with which banks are writing off or offloading loans, such as those to asset-management companies.”

Banks have been using wealth management vehicles and classifying losses as interbank credit to clear unpleasant balance sheets. Regulators may be colluding with banks, and loans which are over 90 days overdue are not always marked as bad debts, explained the Telegraph.

Resolving China’s current NPLs would result in a capital shortfall of $1.1 trillion to $2.1 trillion, which is equivalent to 11-20 percent of China’s GDP. A “$2 trillion black hole,” as The Telegraph’s Ambrose Evans-Pritchard put it, could threaten the stability of China’s economy.

Fitch suggests that the capital gap could rise to 33 percent by 2018. Within two years, China could need as much as one-third of its GDP to rescue its banks. For comparison, bank bailouts in the U.S. and the U.K. reportedly only required about 8 percent of each country’s respective GDP.

“The longer debt grows, the greater the risk of asset quality and liquidity shocks to the banking system,” Fitch warned. “Defaults in China could lead to mutual credit guarantees in the background pulling other firms into distress. A large increase in real defaults risks triggering a chain of bankruptcies that magnifies the potential for financial instability,” Fitch added.

While China’s credit problem is problematic, China is not necessarily heading for a financial meltdown. “We think that sovereign resources will ultimately be needed to help address China’s debt overhang,” Fitch explained. “The dominance of the state-owned banks and the fact that they are funded overwhelmingly by deposits mitigate against a financial crisis.” Of course, the Chinese government’s debt is around 55 percent, and the deep pockets of the state have their limits.

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