Bad debts in China are increasing significantly faster than what the Chinese central bank reports, according to a prominent Chinese banking analyst.
A report in the Financial Times said that analyst Charlene Chu believes that China’s accumulation of bad debts is $US6.8 trillion higher than the official government figures.
Chu built her reputation at ratings agency Fitch before leaving to set up Asia operations for Autonomous Research.
Back in 2011, Chu began making her own separate assessments of China’s overall debt compared to official figures released by the company’s central bank.
Her thesis that many Chinese banks were employing the use of structured debt products that weren’t reported on company balance sheets is now widely-held in the investment community.
According to the Financial Times, Chu’s most recent report said that China’s unofficial bad debt pile could climb to $US7.6 trillion by the end of the year.
That’s more than five times higher than the value of loans which are officially reported as either non-performing or one level above non-performing.
If total non-performing loans really are $US7.6 trillion, it would imply a bad debt ratio of 34%. Chinese government statistics at the end of June reported a bad debt ratio of 5.3%.
Some analysts doubt the veracity of Chu’s workings. Specifically, her estimates of total bad debts in the Chinese financial system is based on a comparison to 11 other economies that had similar debt increases.
However, the increase of bad debts in those comparative economies was driven by an economic downturn, Chinese economist Chen Long said.
“If there’s an economic collapse, of course there will be massive credit losses. No one disagrees about that. But the issue is whether the collapse will actually happen. She takes that as a given,” Long told the FT.
It follows a recent report by the IMF which raised concerns that Chinese policy makers are pursuing growth at all costs, deploying increasing amounts of debt to maintain the country’s annual rise in GDP.
Chu conceded that if a crisis was to occur, it won’t be soon.
She said that the high degree of control the Chinese government has over lending practices can help delay the negative impact of debt problems.
For example, the Chinese government can order a state-banked back to provide emergency funds to a smaller lender facing a liquidity crunch. But this approach also kicks the can down the road without addressing the underlying problems.
“The upside is that it creates stability,” Chu told the FT.
“The downside is that it can create a problem of proportions that people would think is never possible. We’re moving into that territory.”