SOAS Expert Warns of Brewing Chinese Bank Crisis

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A lecturer from London’s School of Oriental and Asian Studies warns of China’s heightened susceptibility to a banking crisis.

Damien Tobin, a Lecturer in Chinese Business and Management at SOAS, University of London, points to a worrying increase in the non-performing loan ratios of China’s biggest state-owned banks in a recent article published by The Conversation.

Three of China’s big five banks have posted gains in their NPL ratios over the past month, with Bank of China’s rising three basis points to 1.46%, ICBC’s climbing 12 basis points to 1.62%, and Agricultural Bank of China topping the list at 2.37%.

Tobin considers the official estimate that NPL’s comprise 6% of total lending to be understated, given disparities compared to provincial data which point to much higher rates, such the official NPL ratio of 2.34% for Shanxi province.

IMF puts China’s dud corporate loans at 15% of total lending, which is equal to roughly 7% of GDP.

Another concerning sign is ongoing growth in total social financing – China’s broad measure of credit in the economy, in tandem with slackening growth in lending to the real economy, which is a sign that funds are being diverted back into the financial system.

Chinese banks hampered by lack of access to fund

According to Tobin a lack of sound funding sources is a key factor exacerbating risk in China’s banking sector.

Tobin points out that foreign investment’s share of gross capital formation has plunged over the past two decades, falling from nearly 10% to under 3%.

The problem of access to funds is worse for smaller banks, who are unable to tap international funds via stock listings or domestic savings via large branch networks.

As a consequence China’s lenders are compelled to avail themselves of riskier funding sources, such as off-balance sheet products and mercurial short-term interbank instruments.

Efforts to forestall crisis will weaken state-owned banks

In order to avert crisis the Chinese government has revived debt-equity swaps for ailing state-owned companies, allowing SinoSteel to convert 27 billion yuan of debt into convertible bonds last year.

Tobin points out, however, that this measure will only transfer their risk to the balance sheets of state-owned banks via government mandate.

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