Last week, we mentioned that China Banking Regulatory Commission (CBRC)’s data showing that the amount of non-performing loans have been on the rise, slowly, but surely, although we believe the figures have understated the true scale of problems.
Indeed, reported non-performing loans number is only a tip of an iceberg of problematic or potentially problematic loans. The outstanding “special mention” loans have been rising for 3 consecutive quarters to about RMB1.46 trillion by the end of second quarter according to First Financial Daily, citing unnamed source, in-line with the trend we see in the actual non-performing loans.
The so-called “special mention” loans refers to loans which are currently not non-performing (one notch above non-performing, to be precise, according to PBOC’s classification). Debtors are still able to service their debts at the moment, yet signs of problems might be emerging, such as slowing sales and profits, falling value of collateral, etc, and negative surprise in the market environment or in the economy may likely render these debts non-performing.
This should, of course, surprise no one. The massive loan growth in response to the financial crisis in 2008/09 was directed into investments, many of them with questionable expected returns even at the time of investments. As the economy slows, the resulting increase of questionable loans is very much expected. Besides asset qualities of real estate related loans and lending to local government financing vehicles (which have been discussed very extensively both here an elsewhere), exports related sector and mutual guarantees scheme are also key drivers of the deterioration of asset quality according to First Financial Daily, citing unnamed source.
So far, as we have yet to see convincing signs of strong recovery of the economy, we believe that non-performing loans (and probably for “special mention” loans as well) could rise further in the future. We also remain sceptical on these figures, and suspect that these figures are understating the true scale of the problems which may surface in the financial system.
This article originally appeared here: China’s “special mention” loans outstanding rose to RMB1.46 trillion
Also sprach Analyst – World & China Economy, Global Finance, Real Estate
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