China’s Non-Performing Loan Problem Is Getting Bigger

Bank of China insignia and customer

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According to Caixin Magazine, Chinese banks have reported 385.97 billion yuan ($60.25 billion) in non-performing loans (NPLs) since the beginning of 2011.Yesterday, 14 of China’s large commercial banks posted their results for the first half of 2011. Of those 14, 11 reported an increase in non-performing loans. Of those 11, 8 reported non-performing loans had increased over 10% since June of last year.

Most of these NPLs are in the form of credit card debt, retail loans, and corporate loans. One institution, Minsheng Bank, reported a 750 million yuan ($117.07 million) increase in non-performing corporate loans since last year.

Economists are blaming this on China’s economic slowdown and the central government’s battle against inflation. Since banks have increased their reserve requirements and interest rates, Chinese companies have faced a capital crunch. Many have turned to the underground banking system to solve their cash-flow problems, others are adding to the non-performing loans recently reported on bank balance sheets.

And it’s only going to get worse. Just yesterday Chinese banks raised reserve requirements yet again, freezing an estimated 887 billion yuan ($138.45 billion) over the next six months. Currently, big commercial banks must maintain a reserve ratio 21 per cent,  while smaller financial institutions must maintain a ratio of 17.5.

In July, the inflation reached a 37-month-high at 6.5 per cent.

Note: The worst two offenders were the Industrial and Commercial Bank of China, which led by the largest amount at 108.2 billion yuan in NPLs, (up 5.7 per cent from the beginning of the year) and Bank of China. BOC lead in terms of percentage, in the first half of 2011 their NPLs jumped 10.13%.

Not settling news, considering that the BOC is now considered “too big to fail.”