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.
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.
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. […]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.
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.