Non-performing loans at Chinese banks jumped by 51% to 1.27 trillion yuan last year, taking them back to levels not seen since June 2006.
According to Bloomberg, citing data released by the China Banking Regulatory Commission (CBRC) on Monday, China’s bad-loan ratio climbed to 1.67% of assets from 1.25% in 2014, while the industry’s bad-loan coverage ratio – a measure of the sectors ability to absorb potential losses from soured credit – weakened to 181% from more than 200% a year earlier.
The increase in bad debts – both in value and percentage terms – follows an unprecedented surge in Chinese debt levels since 2007.
According to data released by the McKinsey Global Institute, Chinese indebtedness quadrupled between 2007 through to mid-2014, rising from $7 trillion to a staggering $28 trillion.
The increase, accounting for around 37% of total global debt growth over the same time period, took the nation’s debt-to-GDP ratio to 282%, above that of both the United States and Germany.
“Three developments are potentially worrisome: half of all loans are linked, directly or indirectly, to China’s overheated real-estate market; unregulated shadow banking accounts for nearly half of new lending; and the debt of many local governments is probably unsustainable,” said McKinsey.
Despite the risks attached to the increased level of indebtedness, Chinese lenders took new loan growth to an unprecedented level at the start of 2016, extending 2.51 trillion yuan worth of new loans in January, the largest monthly total on record.
As a result of the enormous borrowing spree, the total value of outstanding yuan loans increased by 15.3% from 12 months earlier.
The rise in Chinese indebtedness, and the subsequent uptick in the level of non-performing loans at Chinese lenders, has seen some prominent investors warn of an impeding implosion across China’s banking system.
Earlier this month famed US hedge fund manager Kyle Bass suggested that the day of reckoning for China’s banking system may be only “months away”.
During an interview with CNBC, Bass suggested too few investors were paying attention to signs of stress in China’s banking system, warning that after growing to US$34.5 trillion, or more than three times GDP in recent years, a wave of defaults may be about to hit the financial system.
He cited a raft of concerns about the current state of the Chinese economy, pointing to a sharp deceleration in industrial production and the lowest nominal quarterly GDP growth reading seen in 40 years.
“This isn’t an aberration. This isn’t a speed bump. This is China’s excess — let’s call it misallocation of capital — coming home to roost,” Bass told CNBC.
“You can’t grow your banking system 1,000% in 10 years and not have a loss cycle.”
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