China banks see risks in $1.1tln government loans

Lending to unprofitable government companies and projects had saddled China’s banking with 50% non-performing loan ratio.

Chinese banks may struggle to recoup about 23 percent of the 7.7 trillion yuan ($1.1 trillion) they’ve lent to finance local government infrastructure projects, according to a person with knowledge of data collected by the nation’s regulator.

About half of all loans need to be serviced by secondary sources including guarantors because the ventures can’t generate sufficient revenue, the person said, declining to be identified because the information is confidential. The China Banking Regulatory Commission has told banks to write off non-performing project loans by the end of this year, the person said.

The estimate implies $261 billion of debt may go sour, almost five times the $53.5 billion the nation’s five largest banks are raising to replenish capital. China’s banks advanced a record $1.4 trillion of credit last year to support the economy, raising concern that bad loans will surge and force the government to add to the more than $650 billion spent to clean up the banking industry since 1999.

“Unfortunately this smells just like déjà vu of China’s last banking crisis a decade ago,” said Shen Minggao, Hong Kong-based head of China research at Citigroup Inc. “Non- performing loans will increase as a result of last year’s lending spree, which to a certain extent was a delayed form of fiscal spending, and eventually the central government will step in and share the costs.”

View the full story in Bloomberg.