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Chinese commercial banks ended 2015 with non-performing loans at their highest ratio since June 2009, according to official data.

The figures come as a top US hedge fund manager warns that

losses in China’s banking system “could exceed 400 per cent of the US banking losses incurred during the subprime crisis”.

The China Banking Regulatory Commission said on Monday that 1.67 per cent of loans by year-end were non-performing, up from 1.25 per cent a year earlier.

The percentage of “special mention loans”, or loans very likely to become non-performing, rose to 3.79 per cent by the end of December, the highest percentage since China started to publish the indicator in 2014.

By value, non-performing loans at the end of December were at their highest since June 2006.

READ MORE: For Chinese companies handling bad loans of banks, 2016 may become best year yet

The rising loan risks come just as the country’s economy is quickly losing steam. The government is relying on strong bank lending to keep growth afloat despite the waning effectiveness of the credit, with big chunks of the cash believed to flow into unprofitable state-backed projects or even “zombie” companies.

Bank lending for 2015 was a record high, surpassing levels in 2009 when Chinese banks pumped out money to finance a massive stimulus package. Despite that, economic growth slowed to 6.9 per cent, its lowest level in a quarter of century.

READ MORE: China’s banks face challenging year, but crisis unlikely

In a note to investors last week, Hayman Capital Management founder Kyle Bass said “rapid credit expansion in the Chinese banking system will result in significant credit losses that will require the recapitalisation of Chinese banks and materially pressure the Chinese currency”.

Bass said China had conducted the “largest banking system experiment in world history” by encouraging its lenders to undertake massive infrastructure spending programmes.

He forecast that Chinese banks would lose roughly US$3.5 trillion of equity if the system lost 10 per cent of its assets.

The growth in both non-performing loans and special mention loans last year totaled 1.22 trillion yuan (HK$1.45 trillion), just 370 billion yuan less than the 1.59 trillion yuan profits made by all Chinese banks last year.

 

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