Will bad debts continue to hurt Chinese banks?

Reports say that China's non-performing loans surged to US$68b at the end of 2011 - is this the start of a looming credit crisis in China? Find out what analysts from Fitch and Standard & Poor's have to say.

Standard & Poor’s: Terry Sham, Primary Credit Analyst
We believe that banks won’t be able to avoid a gradual rise in NPLs. Standard & Poor’s projects China’s real GDP growth to moderate to 8.3% in 2012, from 9.2% in 2011. The economic slowdown could temper the growth of China’s banking sector and affect its credit performance in 2012. The export sector, particularly small exporters, is likely to be the hardest hit because of the crisis in Europe. Slackened exports and rising labor costs continue to undermine liquidity-strapped borrowers’ cash flows.

Meanwhile, the availability of new credit remains restrained. China tightened credit policies in 2011 to combat inflation, and this has put significant pressure on the liquidity positions of corporate borrowers. The central bank has cut the deposit reserve ratio by 100 basis points to 20.5%, from its peak in December 2011. Such easing could provide some relief to banks’ lending capacity for liquidity-strapped borrowers, especially small exporters. However, tepid deposit growth and a stringent regulatory cap of 75% on the loans-to-deposits ratio have constrained banks’ capacity to lend further. We expect loan growth to trend down to 12%-14% in 2012, from 15.7% in 2011.

Fitch Ratings: Charlene Chu, Head of China Financial
Over the near term, Fitch expects the Chinese authorities to continue a selective policy of forbearance and liquidity support for borrowers, including loan rollovers and restructurings, new loans, and bond issuance. As a result, asset quality issues may not fully appear in non-performing loan (NPL ratios until well into a deterioration, if at all. Instead, delinquencies will manifest themselves first as liquidity stress, as cash inflows from distressed borrowers slow and more resources are directed to support weak entities.