Chinese Credit Markets Are Asking: Who's Bad?

The Chinese credit market is worried. Is the rise in defaults a flurry of individual cases cause by the government regulatory and monetary tightening? Or have banks been hiding their bad debts?

Moral hazard is also weighing on the minds of investors. Some rural banks have local government officials working at the bank and they approve risky loans to the government. Businesses figure if their debt problem is large enough, the government will step in. If it's a small problem, they're on their own. The incentive is clear: load up on debt. It also makes sense for a business to delay until the debt crisis because serious enough for government intervention. Government-backed asset management companies may step in to take bad loans off the banks' books.

Uncertainty is growing. If the bad loans aren't disposed of, they can live on for years, passing between bank and government balance sheets. Banks have responded by curtailing their lending business to private businesses because they cannot be sure of controlling risk should the government intervene. Credit markets are one edge because they don't even know what is a bad loan when the government can step in at any moment.

Chinese provinces bad debt ratios above, Chinese commercial banks below

21st Century: “不良飙升”个案拷问：谁的不良

To the left or to the right, there is no need to sway in the short term regarding the judgment of the quality of bank assets.

In 2017, the industry is still discussing whether the quality of banking assets has ushered in a good turning point, but the non-performing rate of commercial banks in the first quarter of 2018 has increased by 0.01 percentage points to 1.75%. The industry's non-performing rate has not increased for five consecutive quarters streak is broken.

At the end of May, the non-performing rate of commercial banks (excluding discrepancies) further climbed to 1.9%. Later, the two major rural commercial banks caused a downgrade due to the surge in non-performing rates. The other two rural commercial IPOs were cancelled due to asset quality problems. The real asset quality of the banking industry has once again attracted attention.

What is most worrying for the market is, are recently exposed bad assets individual cases or is it only a prelude to the larger-scale exposure of the asset quality problems that the bank has previously masked.

The 21st Century Business Herald reporters from the original CBRC official website to disclose the data and interviews with banks and enterprises in different regions. It is found that the overall stability of the banking industry's asset quality is an industry consensus. The asset quality risks of some industries, regions and some banks are also real, but the relationship between the banks government and enterprises is subtle. "I can't tell who is bad."

Unsolved bureau: Who is bad?

On the one hand, the whole industry is paying attention to and striving to resolve the bad. On the one hand, the non-performing rate has been rising for five consecutive years. A large-scale business person admits to the 21st Century Economic Reporter that the pressure is big, but it is difficult to break through the bottleneck.

He bluntly said that the relationship between government, banks and enterprises is very subtle, and it is unclear who is bad.

“Most of the bad debts in some areas are state-owned enterprises and large enterprises. They used to be pampered before, and bad debts wait for government relief. With the tightening of supervision and industrial transformation, the government is not willing to pay more, but it does not allow banks to lend. At the bank level, I don’t want to pay the bill, I still want to recover the loan. So I signed a contract with the asset management company with the government background. The government provided the guarantee to take the bank’s debt, and the bad account disappeared, but the actual risk still exists.” He explained.

The source further pointed out that this is not the end. Enterprises still need to continue to develop and need funds. The banks also look at the government background guarantees, and even continue to lend money to enterprises because of the consideration of maintaining government relations. If the transformation and upgrading of the enterprise is not successful, more debts may be generated in the future, but the cyclical relationship between such political and financial enterprises is difficult to break.

Business people in a city in North China pointed out that if political, banking, and enterprises push each other, the bad assets will never be resolved. "This situation has become more and more fierce. Some local enterprises do not actively seek solutions after debt problems. They are delaying waiting for government relief. They think that if the debt problem does not rise to social problems, they must bear the burden. On the contrary, if the debt is serious the government will intervene to undertake debts and help solve the problem, the bank has a headache."

Because of its strong background, the Bank has a certain initiative, and its early risk control capabilities are also strong. Small and medium-sized banks, especially rural commercial banks and rural credit cooperatives, are more passive in this. The aforementioned business people said that small and medium-sized behaviors have to lower certain risk control standards in order to seize the market, and local governments have more intervention in local banks, and they are not completely market-oriented.

"For example, the president of a city commercial bank is the second-in-command of the former Finance Bureau of the city. Individual risky projects may not meet the bank's risk control standards, but the relevant departments urged the bank to find a way to find a guarantee to help the loan meet the conditions. The risk is self-evident," he pointed out.

A large cotton textile factory executive in North China told reporters in the 21st Century Economic Report that enterprises are under the greatest pressure when facing debt problems. From the government to the bank, round-the-clock interviews and reviews have been actively seeking ways to repay Debt, but with little success. "The land that can be sold has already been sold, and the assets that can be disposed of have all been disposed of, and the bank loans have been repaid in priority. However, because of the economic downturn, the industrial upgrading is difficult, the operating conditions have not improved, and it is difficult to solve the debt problem fundamentally. To cause social problems, I have to resort to the government," he admitted.

The aforementioned business people of the city commercial bank lamented the reporters of the 21st Century Business Herald. This is like an inextricable bureau. If the non-performing assets cannot be disposed of at the source, the debt can still be returned to and fro between the government, the bank and the enterprises. From the banking level, many banks choose to cover these bad debt risks with retail and small and micro businesses, and reduce the risk and improve the asset quality by shrinking the scale of the corporate business. But this is not the fundamental plan, and practitioners can no longer give a definite answer.