by Xinhua writer Shi Hao
BEIJING, April 2 (Xinhua) -- Financial results of China's major banks released over the past few days have laid bare a worrying rise in non-performing loans (NPLs).
China's five largest banks -- the Agricultural Bank of China (ABC), the Bank of China (BOC), the Bank of Communications, the China Construction Bank (CCB) and the Industrial and Commercial Bank of China (ICBC) -- had a total of 374 billion yuan (60 billion U.S. dollars) in outstanding NPLs at the end of 2013, nearly 47 billion yuan more than at the end of 2012; an average NPL ratio of 1.03 percent.
Smaller banks -- China CITIC Bank and China Everbright Bank, for example -- are in an even worse fix. Their outstanding NPLs shot up 63 percent and 33 percent, respectively. Commercial banks' outstanding NPLs stood at over 590 billion yuan by the end of last year, a 99 billion yuan increase.
"Economic slowdown, overcapacity, weak foreign demand and the after-effects of previous stimulus measures have contributed to the rise in NPLs," HSBC's chief China economist Qu Hongbin told Xinhua.
Moderated GDP expansion and economic restructuring have led to a panoply of ho-hum economic data. Major indicators -- industrial value added, fixed-asset investment, retail sales -- have all slowed in the first two months. The official purchasing managers' index (PMI) for the manufacturing sector rebounded slightly in March after three consecutive declines, but the HSBC/Markit PMI dipped to an eight-month low.
"The discrepancy between HSBC's and official PMI could be attributed to HSBC PMI sampling mainly small enterprises which suffered more in the slowdown," said Lu Ting, chief China economist with Bank of America Merrill Lynch.
The Bank of Communications attributes its NPL rise partly to the lack of resilience of small- and medium-sized enterprises in the steel industry in coastal provinces of Jiangsu and Zhejiang.
The EBT (earnings before tax) margins of steel makers crashed to 0.9 percent in 2013, down from 5.7 percent in 2007, according to Ryan Rutkowski, a China analyst with Washington's Peterson Institute. The steel sector in China has about three trillion yuan of debt, roughly equal to the entire GDP of a country like Poland or Belgium. Some 1.3 trillion yuan of this debt is bank loans. Beside steel, sectors such as cement, photovoltaics, shipbuilding, aluminum are haunted by overcapacity.
"We have clearly felt NPL pressure in the Yangtze Delta since the second half of last year, especially in manufacturing and steel," said Song Xianping, head of risk control with ABC.
"Banks will inevitably be hurt by rising NPLs as outdated capacities are phased out after huge bank loans have been put in," said Guo Tianyong, a finance professor with the Central University of Finance and Economics.
A cooling property market means falling land prices, the meat and drink of many local government financing vehicles (LGFVs). The terms of loans to LGFVs are usually short, while the time to recover capital from investment is relatively long, said Zhou Jingtong, a senior researcher with BOC's international finance institute. For LGFVs, this mismatch may cause liquidity problems, Zhou said.
Earlier this year, bond defaults by two companies in East China -- Shanghai Chaori Solar Energy Science & Technology Co. and Zhejiang Xingrun Real Estate Co.-- rang alarm bells in bloated industrial sectors and the real estate market.
NPL RISKS UNCONTROLLABLE?
The NPL ratio in China's commercial banks was around one percent at the end of last year which may not actually be that high. "This is a relatively low NPL ratio. In 2012, Japan had an NPL ratio of 2.4 percent, Thailand 2.44 percent and Malaysia 1.37 percent," said Rutkowski.
Lu Zhengwei, chief economist at Industrial Bank, agrees with Rutkowski: NPL ratio in the U.S. can be as high as five percent.
"The LGFVs, the property market and an over-investment hangover are problems, but in my view, not systemic risks," said Takehiko Nakao, president of the Asian Development Bank.
Rutkowski also thinks these sectors are not a direct threat to large banks as "they still have plenty of funding with relatively healthy loan-to-deposit ratios".
Major banks have been cutting loans in risky sectors. Last year, ICBC's outstanding loans to LGFVs, property developers and overcapacity industries declined by 94.3 billion yuan, 8.6 billion yuan and 19.9 billion yuan, respectively. Chen Siqing, head of BOC, is closely supervising the quality of assets in the three sectors in 2014. "An economic slowdown usually has a bottom, and stabilizing growth is high on China's priority list," said Qu.
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