China Bank Regulator Cautions on Credit Risks Despite Slower Growth in Bad Loans

(Beijing) — Chinese banks are seeing slower growth in bad loans this year, but the nation’s top banking regulator has warned that it’s too soon to claim success in the fight to contain mounting debt problems.

Speaking at an internal banking sector meeting last week, Guo Shuqing, chairman of the China Banking Regulatory Commission (CBRC), said that riskier bank assets may be hidden off the books, and that the real estate sector is a key problem area.

As of the end of March, nonperforming loans for Chinese commercial banks stood at 1.58 trillion yuan ($229.5 billion), up 67.3 billion yuan from the end of last year. But the increase over the first three months of this year was 50.4 billion yuan less than the same period last year, according to data released by the CBRC last week.

Bad loans as of the end of March accounted for 1.74% of all outstanding loans, 0.01 of a percentage point lower than that at the same time last year. Provisions to cover losses were 2.8 trillion yuan, with a coverage ratio of 178.8%, according to the CBRC.

Slower growth in bad loans and the slightly lower bad-loan ratio pointed to some success in efforts by financial regulators to tame risks from the country’s massive corporate debt overhang and excessive financial leverage.

But Guo warned that there are good reasons to be cautious about problem loans.

“All these figures are accurate, … but we can’t be blindly optimistic about them,” he said, according to people who attended the internal meeting that gathered regulators and bank executives.

Guo said that attention should be paid to the growing levels of loans in the “special mention” category, in which repayment is at risk but debt has not been classified as nonperforming. According to the CBRC, special-mention loans as of the end of March totaled 5.4 trillion yuan, about 5% of all outstanding credit. Meanwhile, the value of loans overdue by more than 90 days but not classified as bad debt was equivalent to 109% of total bad loans.

Guo called on regulators and bank officials to “stay alert” to the dangers from problem loans, adding that they should remain vigilant about the potential for problems from assets that are held off of bank balance sheets.

Some banks have reported no bad loans for years, and this is “very abnormal and worthy of regulatory suspicion,” Guo was quoted as saying.

In early March the CBRC ordered banks to carry out a credit risk assessment to uncover hidden bad loans, such as fraudulent transfers of nonperforming loans or the use of bridge loans to delay the exposure of underlying risk. Banks were required to submit their reports to the CBRC by the end of March. The regulator is expected to complete its credit-risk report at the end of May.

At last week’s meeting, Guo compared banks’ exposure to risks from loans to the real estate sector. As of the end of 2016, outstanding loans by commercial banks to property developers and homebuyers stood at 28.4 trillion yuan, up 26% year-on-year. In the first quarter of this year, property-related lending accounted for 26.2% of all newly issued loans, a drop of 13 percentage points from last year, after regulators issued a slew of policies aimed at reining in property purchases and mortgage lending to cool the white-hot housing market.

Guo said property-related loans accounted for over one-third of China’s 110 trillion yuan of outstanding loans, adding this was “excessive” and potentially risky.

A research report by UBS chief China economist Wang Tao estimated that the total amount of property-related loans for Chinese banks was between 54 trillion yuan and 72 trillion yuan in 2016, equivalent to 24% to 31% of total banking-industry assets.

“If the property industry declines, it will seriously affect local government revenues and banks’ asset quality,” said the report, which was issued in February.

Guo stated that increasing volumes of individual mortgage loans do not have sufficient collateral, while risks are mounting from loans to property developers as authorities tighten controls on the housing market.

The banking regulator is closely watching debt owed by state-owned enterprises and local governments. “Over the last 10 years, the growth of SOE debt has outpaced the growth of SOE assets,” Guo said.

Data from the Ministry of Finance showed that by the end of February, overall debt of state-owned enterprises (SOEs) totaled 86.6 trillion yuan, up 11.6% from the same time last year. The average debt-to-asset ratio has increased to 66% in 2016 from 56% in 2006.

Guo said at the meeting that some SOEs or government-backed projects have raised funds through the shadow banking system, such as wealth management and trust investment plans, through which bank loans are often disguised as equity investments to skirt scrutiny on bank lending or local government borrowing.

According to Huang Jie, a banking analyst at China International Capital Corp., companies had about 2 trillion yuan in borrowings at the end of 2016 disguised as investments, mainly through banks’ wealth management funds, trust companies and insurers, up more than 25% from the beginning of the year.

As a means of curbing shadow lending activities, the CBRC in a policy document issued on April 10 asked banks to examine their investments in government projects, investment funds and private-public partnership projects that use wealth management funds to remain off their balance sheets.

Contact reporter Han Wei (weihan@caixin.com)