Chinese Regulators Fail to Recognize Extent of Bad Bank Loans, Survey Shows

(Beijing) —– Chinese banks’ bad loans are increasing and are largely underestimated by regulators, according to a recent survey, while asset management companies (AMCs) are taking a more prudent approach to bank bailouts amid a sluggish economy.

China’s non-performing loan ratio will reach 3% by the end of this year, according to a recent survey of more than 200 bankers and asset managers conducted by state-owned China Orient Asset Management. More than 20% of the respondents believed the ratio will hit 4%.

The unofficial estimate is higher than the figure released earlier this month by the China Banking Regulatory Commission (CBRC), which said bad loans had increased to more than 1.49 trillion yuan ($216 billion), with a bad-loan ratio of 1.76% by the end of the third quarter.

Most of the non-performing loans were granted to sectors with excess capacity such as steel making and coal mining, the report says. And commercial lenders will likely be exposed to more credit risks in the next three years as some companies halt production or are forced into bankruptcy.

The survey estimates that "trillions of yuan" of loans will end up in trouble in the next four years due to government efforts to reduce overcapacity.

An additional problem is a tendency of some Chinese banks to bundle problem loans with normal ones, the report says.

While bad loans are expected to rise, so too are the difficulties of disposing of them.

Often called "bad banks," AMCs are set up to buy up bad debt from banks and recover as much money as they can from selling or restructuring assets.

"Due to disputes over the pricing of debts, asset managers are now acting with caution, which explains the small size of deals and the slow process of writing off bad bank loans," said Wu Yue, China Orient Asset Management chairman.

More than 60% of surveyed bankers and asset managers attribute their prudence to the sluggish economy, which is dragging on asset prices.

The report also points out that less than 30% of the bad loans transferred to asset management companies have been recovered from debt-ridden enterprises, due in part to the absence of a set of sound laws and regulations to protect creditor rights in case of dispute.

The process could be speeded up through the introduction of additional market participants such as private enterprises, foreign investors and investment funds, according to China Orient Asset Management.

So far, more than 30 AMCs have been set up by local governments in a bid to clear mounting provincial-level debts.

The report shows that local asset managers are cultivating closer relationships with local governments and banks. But what limits the development of local AMCs, according to the report, is a lack of funds and asset management professionals.

In October, the CBRC laid out a policy allowing local governments to run additional AMCs, and lifted a rule banning local asset managers from transferring bad assets to other institutions.

Contact reporter Dong Tongjian (tongjiandong@caixin.com); editor Kerry Nelson (kerry@caixin.com)