When Jinzhou Bank in northeast China showed signs of crisis earlier this year, state media suspected that a billionaire named Li Hejun might be behind the problems. Mr. Li, a solar panel tycoon, was once China’s richest man. His company was known to have close ties to the bank. Not long after his arrest was announced, Jinzhou Bank suspended trading of its shares and told investors it was restructuring its operations.
Oddly enough, the bank’s finances appear to have been in good shape. In the first half of 2022, the last period for which detailed information is available, bad debts were low overall. Although one number is particularly concerning – more than 50 percent of personal and commercial loans had become non-performing – these types of loans accounted for only 1 percent of the total. The situation appears to be normal for small and micro-enterprise loans, which make up about half of the bank’s loan portfolio, with only 3 percent defaulting.
Banks remain silent
But is this the whole story? In theory, there is no meaningful distinction between personal loans and small and micro-business loans, says Jason Bedford, a veteran banking analyst. The two types of loans are used in similar ways and should have similar risks. In practice, however, there is a key difference: loans to small and micro-enterprises are still covered by a Cold War-era moratorium that allows banks not to report bad debts. Therefore, it is possible that a large portion of Jinzhou’s loan portfolio consists of unrecognized bad debts. The bank has said next to nothing about its condition since the beginning of the year.
If such hidden bad debts are lurking at Jinzhou Bank, they could also be lurking elsewhere. This is a worrying prospect because Chinese finance is already plagued by problems. Local governments are struggling to repay at least 65 trillion yuan ($9 trillion) in off-balance sheet debt. Many of the country’s biggest developers have already defaulted on offshore bonds, owing residents trillions of yuan worth of unbuilt homes. China’s largest asset management firms have started skipping payments to investors. Given that this type of hidden debt has received little attention, Jinzhou’s problems should serve as a warning.
The problems with loans for the smallest companies began with the beginning of the epidemic. When China’s economy collapsed in January 2020, the central bank imposed a moratorium on small and micro-enterprise loan repayments until June of that year to prevent a wave of defaults. Less than three months into the move, officials estimated that around 700 billion yuan in payments had been deferred. The moratorium has since been extended several times, with authorities citing the ongoing impact of Covid. There is no estimate for the total amount of unpaid loans, and banks are not required to publicly disclose this until next year.
The moratorium also coincided with another government initiative. To stimulate the economy, the central government has encouraged banks to lend to the smallest businesses at the lowest possible interest rates. Although such a policy has been attempted for years, banks have resisted it, preferring to lend to the large, often state-owned companies with which they already have relationships. This time, however, the policy worked. A crackdown on the banking sector that culminated in the arrest of the president of one of China’s largest commercial banks last year has increased the willingness of bosses to follow official orders.
Officially everything is clean
As a result, about 28 percent of all loans in China were made to small and micro businesses at the start of the year, up from 24 percent at the end of 2019. Many of these loans are simply renewals of older, unpaid debts. It’s well known that small businesses have struggled during the pandemic. Despite this, there has been little increase in non-performing loans, notes Alicia Garcia Herrero of Bank Natixis.
Another result is what some analysts see as catastrophic asset mispricing. Small businesses are typically considered the riskiest, but loans to small and micro businesses were still made at extremely low interest rates. The banks offered them at an average annual interest rate of 4 percent, which was around 6 percent in 2019. To make matters worse, the recent surge in long-term deposits, which bear interest at higher interest rates, is further squeezing banks’ profit margins.
Few lenders have indicated the extent to which they have deferred loans. The Minsheng Bank, one of China’s largest lenders, said in its semi-annual report last year that it provided 212 billion yuan in renewed loans and deferrals in the past six months, accounting for about 9 percent of its total corporate loan book. She has since declined to provide similar information. The central bank provides funds to banks that can be used to support specific areas of the economy. In a recent report, it said it issued 2.7 trillion yuan in loans to small businesses in the first half of this year.
Every loan moratorium comes with the hope that a short period of forgiveness and renewal will allow struggling businesses to get back on their feet after an economic shock. The original decision may have saved tens of thousands of companies and even some banks from going under. Now the fate of the opaque mountain of debt – no matter how large it may be – depends on China’s economic development in the coming months. Although the manufacturing purchasing managers’ index shows that the outlook for large companies has improved slightly in recent months, the outlook for small and medium-sized companies continues to decline. The economic hangover of the Covid era has not yet been overcome. It could get even stronger now.
2023-10-17 15:26:20
#Chinas #banks #full #bad #loans
