Central Bank Sounds Alarm on Non-performing Loans in China’s Northeast

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The flagship news publication of the People’s Bank of China reports that non-performing loans are on the rise in China’s north-eastern provinces, as well as the Bohai Economic Rim that girds Beijing and Tianjin.

Writing for PBOC’s Financial News (金融时报), Zhou Cui notes that first half results point to a broad-based decline in non-performing loans amongst China’s biggest lenders, with strong GDP growth helping to shore up the profit levels and asset quality of major banks.

The Industrial and Commercial Bank of China – China’s biggest bank, saw its NPL rate fall 0.05 percentage points during the first quarter to 1.57%, while the People’s Bank of China’s NPL rate fell 0.08 percentage points across the same period to 1.38%, as its NPL balance posted year-on-year growth of 1.022 billion yuan to 147.025 billion.

China Construction Bank also saw a modest decline in its NPL rate of 0.01 percentage points to 1.51%, with its NPL balance rising 10.062 billion yuan since the start of the year to reach 188.752 billion yuan.

Bank of Communications also saw a 0.01 percentage point drop in its NPL rate to 1.51%, with its NPL balance rising 3.553 billion yuan since the start of 2017 to reach 65.953 billion yuan in total.

In addition to the big state-owned lenders, joint-stock commercial banks such as China Merchants Bank, Industrial Bank Co. and China Everbright have seen similar gains in asset quality on the back of improvements to the broader macroeconomic environment.

Zhou Cui, notes, however, that while NPL rates may have decreased across the board for China’s leading bank, certain geographic regions and sectors have posted increases in their defective lending rates.

Sectors and industries that continue to see high NPL rates include manufacturing and mining, as well as wholesale and retail trading.

“The NPL balance for the manufacturing sector has increased significantly, mainly in light manufacturing, the chemical industry and construction materials,” said an ICBC spokesperson.

“[These areas] are more heavily impacted by factors such as slowing macroeconomic growth, insufficient constraints.

“Enterprises in some industries have defaulted on their loans as a result of intensifying competition and a slide in earnings capability.”

In terms of geographic regions, while loan quality of China’s leading banks has improved in the major economic hubs of the Pearl River Delta around Guangzhou, and the Yangtze River Delta around Shanghai, NPL rates continue to rise in the Bohai Economic Rim and the Chinese north-east.

ICBC’s latest results indicate that its NPL rate in the north-east had risen to 1.98% at the end of the last reporting period from 1.64% at the end of last year, while CCB has seen its NPL rate for the region rise to 2.7% from 2.3% across the same period.

According to observers the Chinese north-east, which was formerly a stronghold of heavy industry, has seen economic growth slide on the back of structural imbalances and heavy population outflows, while industrial overcapacity and an abundance of zombie state-owned enterprises have made high NPL’s an inevitability.

Leading banks raise provisions in anticipation of NPL rebound 

While strong GDP growth for the first half may have given Chinese banks a much-needed short in the arm, both state-owned and commercial lenders are increasing their balance sheet provisions in order to shore up resilience in the case of a rebound in NPL’s or cyclical economic fluctuations.

ICBC has raised its coverage ratio over the past two quarters to 145.81% by the end of June, for a gain of 9.12 percentage points since the start of the year.

CCB has raised its coverage ratio to 160.15% across the same period for an increase of 9.79 percentage points, while ABC has lifted its coverage ratio to 181.80%, for an increase of 8.4 percentage points.

 

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