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China’s Looming Bad Debt Risks

The China Banking and Insurance Regulatory Commission (CBIRC), which regulates the country’s financial industry, is concerned about the rise in non-performing assets, or bad loans, due to the deteriorating economic and epidemic conditions. The CBIRC suggested measures to prepare for the increase in non-performing loans.

In response to the questions from journalists, the spokesperson of the CBIRC listed four major risks and challenges.

1. The increased pressure of non-performing loans. Although the balance of non-performing loans has not increased significantly since the beginning of this year, due to the time lag between the decline in the real economy and the impact seen in the financial sector, as well as the short-term hedging effect of macro policies, the risk of default has been temporarily delayed. However, the number of non-performing loans will continue to rise in the coming months.

2. Serious problems in some small and medium-sized financial institutions. As the asset quality has increasingly deteriorated under the impact of the epidemic, risks continue to build up.

3. The resurgence of chaotic practices. Some high-risk shadow banks have revived; the leverage (debt) ratio of companies and households has increased. Some funds have flown into the real estate and stock markets, adding to the asset bubbles.

4. Illegalities occur from time to time. For example, the fake gold scandal of Wuhan’s Kingold Jewelry has revealed the almost nonexistent internal control and risk management in some financial institutions.

As of the end of June, the balance of non-performing loans in the banking industry was RMB 3.6 trillion (US $0.51 trillion), an increase of RMB 400.4 billion (US $57.2 billion) from the beginning of the year, with a non-performing loan ratio of 2.10 percent, 0.08 percentage points higher than the beginning of the year.

Source: Central News Agency, July 11, 2020