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Major Chinese banks such as ICBC are being probed by regulators for failing to report non performing loans:

China's banking regulator has noticed a contradiction between a surge in some categories of problematic loans on the one hand and a decline in non-performing loan ratios on the other over the past few months, and it is taking a closer look at lenders' loan classification, said a senior official on Monday.

"We are already aware of an obvious increase in overdue loans and 'special-mention' loans. Further statistics and analysis are necessary for us to discover the cause of the inconsistency and how much hidden risk there is," said the source from the China Banking Regulatory Commission, who declined to be identified. […]

The regulator ordered the top five lenders - Industrial and Commercial Bank of China Ltd, China Construction Bank Corp, Bank of China Ltd, Agricultural Bank of China Ltd and Bank of Communications Co Ltd - to examine the classification of all their loans as of the end of last year, the newspaper reported, citing an anonymous source.

As China's real estate bubble pops, its massive pile of local government debt is coming due:

China's mounting local government debts pose growing risks as sliding revenue from land sales means that governments are likely to have difficulty in repaying debts, analysts said at the China International Banking Convention 2012 held in Beijing Thursday. [...]

"We expect the non-performing loan ratio to pick up over the next 18 months as loans made during the credit boom of 2009-10 come due," said Zhang Yi, vice president and senior analyst with Moody's Investors Service.

The non-performing loan ratio (NPL) could rise to 6 to 9 percent over the next six quarters, she said.

China's banks have swallowed hundreds of billions in bad loans, exposing balance sheets ”built on quicksand”:

Start with Industrial & Commercial Bank of China Ltd., the world’s most valuable bank, at least on paper, with a $238 billion market capitalization. Much of its capital consists of the remnants of bad loans dating to the 1990s, which ICBC now calls receivables. One such receivable represented about a third of ICBC’s shareholder equity, as of Dec. 31. It was scheduled to start coming due in 2010 but wasn’t repaid, and still sits on ICBC’s books at its original value. […]

At the end of 2004, before its most recent restructuring by the Chinese government, Beijing-based ICBC said about 21 percent of its loans were nonperforming. Today the same bank, which is 71 percent state- owned, classifies less than 1 percent of its loans that way.

You can choose to believe that latest figure if you like. Either the Chinese government has become extremely skilled at lending in a very short time, and Chinese borrowers have become even better at repaying. Or the numbers are too good to be true, in which case the quality of the bank’s capital matters a great deal, as a gauge of its ability to absorb losses. If nothing else, a look at the receivables at ICBC and other large Chinese banks provides insights into what passes for normal in the country’s banking system. Everything is a big circle.

While defaulting loans soar, ICBC's shares are being dumped.  As much as China copies US systems it hasn't learned to respect their intended use or nature of its property.
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Comment Preferences

  •  Tip Jar (2+ / 0-)
    Recommended by:
    cotterperson, ManfromMiddletown

    What we are seeing today is not an aberration; the aberration is only that we are seeing it, and what we are seeing is still not most of it.

    by The Anomaly on Fri Jun 08, 2012 at 04:32:08 PM PDT

  •  non-performing loans aren't the same as (0+ / 0-)

    "bad" loans, at least under GAAP (Generally Accepted Accounting Principles), which is the basis used in the USA for characterizing these items. a "non-performing" loan is one in which payments haven't been made for the previous (i think, i'm not a bank expert) 3 months. interest income is still reported on it. a loan goes "bad", and is written off as uncollectable (normally, there are some exceptions), if payments haven't been made for 6 months, and there's no agreement in place. that's when it hits the income statement and the balance sheet.

    re-characterizing the loan into a receivable is, all by itself, a "red flag" for auditors, absent some compelling legitimate reason for doing so. however, even that won't save it from being written off, if no payments are forthcoming, it will simply delay the inevitable for a few months, assuming the bank is following GAAP.

    unlike the US, where the very worst thing that could happen to an officer of the bank convicted for fraud is jail time, in china they may well find themselves with a bullet in the back of the head, and their body being parted out.

    •  When loan sharks come knocking (2+ / 0-)
      Recommended by:
      cotterperson, ozsea1

      factory bosses disappear:

      As China’s economy has begun to slow slightly, more and more entrepreneurs are finding themselves in Mr. Sun’s straits — unable to meet debt payments on which interest rates often run as high as 70 percent in this nation’s thriving unregulated, underground loan system. Such illegal lending amounts to about $630 billion a year, or the equivalent of about 10 percent of China’s gross domestic product, according to estimates by the investment bank UBS.

      In recent months, at least 90 business executives from this coastal city, a one-hour flight south of Shanghai, have disappeared because of mounting debts and impending bankruptcies, according to a local government report.

      What we are seeing today is not an aberration; the aberration is only that we are seeing it, and what we are seeing is still not most of it.

      by The Anomaly on Fri Jun 08, 2012 at 05:28:48 PM PDT

      [ Parent ]

    •  Your last statement is nonsense and incendiary (0+ / 0-)

      Got any links to this actually happening?

      What about my Daughter's future?

      by koNko on Fri Jun 08, 2012 at 11:49:07 PM PDT

      [ Parent ]

  •  Gee, if the banks in China are that bad (1+ / 0-)
    Recommended by:

    ...then they should expand into the US market. Seems like a perfect fit.

    Federal Reserve Approves China’s First Takeover of U.S. Bank

     May 10th, 2012

    The U.S. Federal Reserve has given the go-ahead for state-owned Chinese banks to enter the U.S. banking market.

    The U.S. central bank on Wednesday approved an application by China's biggest bank – the Industrial and Commercial Bank of China – to buy an 80 percent stake in the U.S. branch of the Bank of East Asia. It is the first time a Chinese state-controlled company has been approved to acquire a U.S. bank.

    The landmark step comes days after U.S. and Chinese officials held high-level financial talks in Beijing. U.S. officials said during the talks that China has made progress on a number of issues, including taking steps toward a more open and market-oriented financial system.

    In making its decision, the Federal Reserve said it had concluded that ICBC, which is 70 percent owned by the Chinese government, will be suffiently supervised and had the resources to adequately support the U.S. branches.

    The Federal Reserve on Wednesday also allowed two other Chinese financial institutions to enter the U.S. market, allowing the Bank of China to open a branch in Chicago and the Agricultrual Bank of China to set up a branch in New York.

    "People who are forgetful have no future." — Chen Guangcheng, blind human rights activist who escaped house arrest and sought refuge in the U.S.

    by Pluto on Fri Jun 08, 2012 at 09:37:44 PM PDT

    •  ICBC and Ag Bank are huge (1+ / 0-)
      Recommended by:

      And pretty much hold the liquid assets of most Chinese workers, the remainder being in Post and Telecoms accounts.

      Whatever risks they have in non-performing loans are more than covered by deposits, which will increase over the next few quarters as Chinese take advantage of the higher 90 day interest rates announced last week (Mrs koNko jumped at the chance, LOL).

      And more importantly, there is no such thing as derivatives in China, so these sorts of unpredictably risky investments are not part of the banking picture. What you have are mainly piles  of bad real estate loans that need to be written-off.

      Chinese banking is thankfully quite boring.

      What about my Daughter's future?

      by koNko on Sat Jun 09, 2012 at 12:01:35 AM PDT

      [ Parent ]

      •  Moodys Rating Agency (1+ / 0-)
        Recommended by:

        Just completed a full study of the banks in question. They were judged to be "stable" which cannot be said of many in the US and UK.

        •  They are. (1+ / 0-)
          Recommended by:

          There are some smaller banks in China that are not very stable and arguably at risk from bad loans, the the majors such as ICBC, Ag, BoC, China Development Bank and Guangdong Development Bank are huge, well funded and ... um .... "too big to fail", i.e., the government would bail them out if needed.

          The banking sector in China is quite different than in the West. Some have called it "prehistoric" and there is some truth to that in the sense the scope of business is pretty limited and straight-forward, and in-bank services s-l-o-w as the cash is counted 3 times and the stack of transaction documents carefully checked, signed and stamped by both parties (you don't want to be in line behind Grandma).

          But on the plus side, they have a huge number of depositors who save too much. (;-)

          Anyway, none of this is new. Chinese banks have been carrying bad development loans for decades!

          What about my Daughter's future?

          by koNko on Sat Jun 09, 2012 at 01:25:18 AM PDT

          [ Parent ]

  •  China does not copy the US banking system (1+ / 0-)
    Recommended by:

    There are no derivatives involved. Simply don't exist in China. Bad loans held by banks are bad loans, and the proper classification of such are what this investigation is about.

    BTW, ICBC is in no risk of default, this is the largest bank in China and is in no danger of a liquidity crisis; in fact, I'm comfortable predicting their cash deposits will actually increase in the next few quarters as the interest rate on term deposits was just increased and people will take advantage of that.

    And then there is the perennial question of "The Bubble". Over the past couple of years the government has been taking measures to gradually deflate it and that, actually, accounts for a lot of the bad loans, both in the private sector (developers, speculators who got over their heads) and public sector (local governments and SOEs that got over their heads). So the question is, does the government have enough to cover this? Yes. If you research the topic you will find they are already doing so, and I think this puts a few more logs in the fire under regulators asses.

    LOL, you picked a hell of a week to post a link about internet espionage and respecting intellectual property.  Very funny, thanks for the laugh!

    Perhaps you should learn more about the scope of the Chinese banking systems before making such comparisons?

    What about my Daughter's future?

    by koNko on Sat Jun 09, 2012 at 12:24:09 AM PDT

    •  Fascinating, that one link to Flame (1+ / 0-)
      Recommended by:


      •  Yes, very interesting. (1+ / 0-)
        Recommended by:

        Went a little over my head first time I read it, but after reading through some source material I think I get the basic idea of how this works. Maybe.

        Actually, I rather see cutting edge math and computer science used in these battles than traditional weapons, but the problem is when the cat gets out of the bag and the technology goes public, you get another kind of "nuclear threat".

        However, the more I read about Flame, the more I'm impressed with the brains of whomever designed it, quite a piece of work.

        Inadvertently, this is now going to cause a headache for commercial IP workers because Microsoft just changed the code of it's update apps to eliminate proxies complicating the usual process used to manage corporate IT devices.

        Great opportunity for Apple Fanboys/Fangirls to give MS counterparts another black eye about Windows vulnerability. Maybe Tim Cook will brag OSX users don't get "Flamed" as an opener in his WWDC address on Monday (actually, Cook is too shy to say that, but Jobs would).

        What about my Daughter's future?

        by koNko on Sat Jun 09, 2012 at 01:38:09 AM PDT

        [ Parent ]

  •  I'd like to add to my previous remarks (2+ / 0-)
    Recommended by:
    Pluto, xanthippe2

    I've read the articles you linked and they support my previous remarks, so let's understand why.

    The Bloomberg piece sates "The Chinese government is like Wall Street in that it always pays itself first". Correct. The Chinese government, which is a majority owner of the banks in question, ultimately stands as the funder of last resort and has very deep pockets, unlike the US or European governments which already stand on a mountain of public debt.

    Secondly, what are the tools the government has at it's disposal to manage the situation? Typically a combination of:

    Prime interest rate regulation. Again, unlike Western governments which have effectively reduced rates to zero and so have run out of rope, Chinese rates are still higher than where Western rates stood before the financial crisis, so they have plenty of rope left.

    Reseve ratio. Typically, the government has required much higher reserve ratios than Western banking systems and these ratios are periodically adjusted to tighten or loosen lending; they were recently taken down a notch as a stimulus measure.

    Cash. As noted above.

    Depositors. Who "save too much". Maybe. Maybe not.

    Trading band limits. Chinese securities are limited to narrow trading bands and suspended from trade if they exceed daily limits. In fact, recently such bands have been adopted by Western exchanges to reduce volatility and this is a needed reform.

    Also consider what Chinese banks don't have: derivatives. This is very important because such investment vehicles were actually the spark that lit the fire of the recent crisis and still a mess that remains to be cleaned up; who "owns" a lot of this Western debt is yet to be determined or decided (OK, the public owns it, right?). Can I say Western governments respect the property rights of the rich more than poor or middle class taxpayers?

    Lastly, let's consider the risk these articles discuss: risk to stockholders should the banks need restructuring. IOW, the concern that should the government step in to manage an insolvent bank, investors could get burned by having their equity in holdings diluted. So?

    What about my Daughter's future?

    by koNko on Sat Jun 09, 2012 at 01:12:12 AM PDT

    •  Your comments are outstanding in this piece. (2+ / 0-)
      Recommended by:
      koNko, xanthippe2

      There are a couple of concepts that Americans may not be able to apprehend. For example, thoughts like this are never conceived of by the public:

      Lastly, let's consider the risk these articles discuss: risk to stockholders should the banks need restructuring .... investors could get burned by having their equity in holdings diluted. So?
      When the big banks were not immediately nationalized in 2009, a second, larger crash could be accurately predicted.


      The irony is that AIG (the holder of China's Social Securty fund at the time and the only 100 percent foreign-owned investment house in China) was the architect of this:

      Also consider what Chinese banks don't have: derivatives. This is very important because such investment vehicles were actually the spark that lit the fire of the recent crisis and still a mess that remains to be cleaned up....
      China took away a very good example of what not to do.
  •  Chinese Bankers (0+ / 0-)

    Don't they have lobbyists in China? Can't they just give enough money to the politicians and make this probe go away?

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