Chinese Banks are Hiding Bad Loans: China Orient Asset Management


One of China’s leading asset management firms claims that the scope of non-performing assets in the banking sector is widely underestimated, because lenders are concealing the extent of their dud loans.

The “China Financial Non-performing Asset Market Survey Report (2018)” (中国金融不良资产市场调查报告(2018)) released by China Orient Asset Management on 12 April claims that the NPL ratios of Chinese commercial banks have been widely underestimated on paper, with lenders incentivised to “gloss over” their financial reports and conceal their NPL’s.

The report said that Chinese banks are using a range of methods to conceal NPL’s, including reductions in assessment standards and the provision of falsified reports.

The report also forecasts that banks won’t see a peak in their NPL-ratios until 2020, after which point they’ll begin to decline.

The 2017 annual reports released by China’s big five banks pointed to the first broad-based decline in NPL ratios since 2012, while the China Banking and Insurance Regulatory Commission recently indicated that the performance of the sector in the first quarter had been strong.

According to China Orient’s NPL report, however, the reported decline represents just a brief dip, with ratios set to rise steadily over the next three to five years, and institutions also “adopting multiple measures to conceal non-performing assets.”

The report outlines several key reasons for ongoing gains in the NPL’s of banks, chief amongst them the fact that the Chinese economy remains in a long-term “L-shaped” growth pattern.

According to the report structural adjustments remain painful, the scope of concealed non-performing assets remains immense, and a peak in the clearance of accumulated NPL’s has not yet arrive

The report also points to strengthened financial regulation, such as the launch of new asset management regulations intended to curb the “implicit guarantees” undergirding financial instruments such as wealth management products, as exacerbating the risk exposure of credit assets.

China’s push for supply-side structural reforms will also increase supply on the non-performing asset market, by accelerating the clean-up of zombie enterprises, removing excess capacity, and reducing the turnover rate for the accounts receivable of relevant non-financial enterprises.

Data released in February by the China Banking Regulatory Commission (CBRC) points to a steady rise in non-performing assets in tandem with growth in the assets of Chinese commercial banks.

The NPL balance of Chinese commercial banks stood at 1.71 trillion yuan as of the end of 2017, for an NPL ratio of 1.74%, and a year-on-year decline of 0.01 percentage points.

The special-mentioned loan balance stood at 3.41 trillion yuan, for a ratio of 3.49%, while loan loss provisions stood at 3.09 billion yuan, for an increase of more than 400 billion yuan compared to the end of 2017.

The provisions coverage ratio was 181.42%, for a rise of 5.02 percentage points compared to the end of 2016.