Hot money in mainland China has been rushing for stocks, real estate and, most recently, commodities, hoping to making a killing before the bubbles burst.
These are all side effects of the very easy monetary environment created by the central bank. It’s not out of nowhere that international fund manager George Soros has warned of a credit crisis in China.
Chinese regulators are merely emulating the US Federal Reserve in what it did to resolve the global financial crisis that began in 2008.
Because of the Fed’s easy-money policy from 2008 until June last year, overseas US dollar-denominated loans owed by the private sector rose by US$4.24 trillion, much higher than in Japan and Europe.
It means the US dollar is the source of liquidity in global markets.
The biggest problem China faces with credit is its fast expansion.
By the third quarter of last year, China’s overall debt owed by non-financial entities was about 165.7 trillion yuan (US$25.5 trillion), 2.5 times the level in 2008.
The ratio of China’s combined corporate and household debt to its gross domestic product soared to 205.2 percent, a similar level to Japan’s in the 1990s.
As the United States starts to normalize interest rates, Asian companies have been actively repaying their US-denominated debts as part of their efforts to deleverage.
To offset the draining of liquidity from the system, the Chinese central bank has been injecting liquidity into the market to stabilize economic growth.
Chinese banks have become the victims.
In general, asset quality has deteriorated at the Hong Kong-listed mainland banks.
The bad-loan ratio at the four biggest state-owned banks rose to 1.72 percent in the fourth quarter of last year from 1.26 percent a year earlier.
The climbing bad-loan ratio reflects the looser control over new loan approvals by the banks amid the government’s calls to lend more.
So it is likely that the bad-loan ratio for mainland banks in the first quarter increased, given the explosive growth of new loans reported in the period.
That is why investors are not interested in mainland banks in spite of their low valuations.
Mainland banks will report their first-quarter results in the coming days.
The record-high new loans in the first quarter mean the banks will have to hold higher provisions for bad loans.
Meanwhile, their net interest margin has narrowed, so the earnings of the banks are under pressure.
Some major banks’ bad-loan coverage ratios, like those of China Construction Bank (00939.HK) and the Industrial and Commercial Bank of China (01398.HK), are near the floor of 150 percent. The ratio at the Bank of China (03988.HK) has already fallen below the regulatory requirement.
This means that if the banks are to lend more, they will have to put part of their profits into the provision pool to meet regulatory demands.
Given this situation, is it meaningful for the banks to hold equity in zombie companies instead of holding their debt?
This article appeared in the Hong Kong Economic Journal on April 27.
Translation by Myssie You
[Chinese version 中文版]
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