Chinese regulators issued warnings about a potentially sharp rebound in non-performing loans, especially amongst smaller banks that have directed funding to sources «causing asset bubbles».
Some small and mid-sized banks are undergoing asset deterioration due to accumulated risk, according to the China Banking and Insurance Regulatory Commission (CBIRC) in a statement over the weekend. Capital from such lenders have been directed to the housing and stock markets which not only violate regulations but are «causing asset bubbles», the CBIRC added.
As of the end of June 2020, China’s bad loan ratio rose eight basis points from 2019-end to reach 2.1 percent.
Tighten Controls
In addition to weaker assets, the CBIRC also underlined the up to one-year lag in risk exposure due as banks can book interest income early even when actual repayment are delayed under new rules. As a result, the regulator urged lenders to prepare for a response to the potentially sharp increase in non-performing loans that have yet to be reflected on paper.
Profits should be retained to accumulate capital by various means including reduction of bonuses, the CBIRC said.
Mounting Risks
Regulators have been eying risk at small and mid-sized lenders but have also signaled that support would be lessened. In April, CBIRC chief Xiao Yuanqi said support would be focused on small businesses while plans were drafted for «market-oriented» restructuring of smaller banks.
Smaller lenders aside, China’s broader banking system is also facing ample headwinds. Following several reported bank bailouts and bank runs, regulators imposed domestic controls on cash withdrawals and publicly named «illegal shareholders» of firms threatening financial stability.
As of 2019-end, PwC estimated that Chinese banks held $1.5 trillion of bad debt and S&P forecast predicted nearly another $500 billion in non-performing assets due to the coronavirus outbreak.
