Non-performing loans have been dealt with effectively over the past decade, but as those old loans and the current financial rescue packages are added up, China’s financial system is heading for an unprecedented stress-test, writes Arthur Kroeber in the Financial Times.
Chinese NPLs can be divided into four tranches. Tranche 1 is Rmb1,400bn removed from the “Big Four” commercial banks – Bank of China (BoC), China Construction Bank (CCB), Industrial and Commercial Bank of China (ICBC) and Agricultural Bank of China (ABC) – and China Development Bank in 1999.
Tranche 2 is Rmb1,300bn removed from the first three of the Big Four in 2004-05 as they were being prepared for international stock market listings, plus some other bits and pieces from other banks in 2007.
Tranche 3 is Rmb816bn removed from ABC in 2008, presumably preparing the ground for it to list.
And Tranche 4 consists of whatever NPLs still sit on the banks’ balance sheets, especially as a result of this year’s lending binge.
Strategy was: rolling them over into the future. But a time-bomb is ticking, depending on the economic growth rate of the country. The burden for the future is substantial, but not catastrophic, writes Kroeber:
But this bet absolutely cannot be placed a third time.
The above scenarios only work if the financial system generates no net new NPLs in 2011-2019 beyond the banks’ own ability to provision and write down.
After 2020, demographic and other factors will turn unfavourable, and the structural real GDP growth rate will fall from 10 per cent in 1980-2008, and an expected 8 per cent or so in 2010-2020, to around 5 per cent. When that happens, growth can no longer erase past NPLs – only inflation can.