BOFIT Viikkokatsaus / BOFIT Weekly Review 2020/14

Even as China's big banks have been reporting juicy profits for 2019, international credit ratings agencies are warning of heightened risks to the banking sector, as the coronavirus crisis is eroding the quality of bank loan portfolios. The heavily leveraged corporate sector, faced with the additional burden of shutting down and restarting operations, is finding it even harder to service debt. In addition, banks have been ordered to help especially the SME sector through these hard times banks are expected to play a critical role in getting economic growth back on track.

While the true figure for the Chinese banking sector’s non-performing loans remains a matter of speculation, it is known to be an amount much greater than that reported by banks (e.g. BOFIT Discussion Paper 2/2020). Estimates before the coronavirus epidemic were in the range of 5–20 % of the total loan stock. Last autumn, the PBoC published stress test results showing that a slowdown in economic growth to just over 5 % p.a. would significantly increase the amount of non-performing loans of large and mid-sized banks, while a slowdown in GDP growth to 4 % p.a. would create a situation where many banks could no longer meet minimum prudential capital requirements. China’s current economic growth is well below anything envisioned in the stress tests.

Even before the coronavirus pandemic, small and mid-sized banks were having problems. Last May, officials seized Ba-oshang Bank and later last year launched bailouts of at least three other banks. In the March, one the banks (Bank of Jin-zhou) was restructured. Close to a 40 % stake in the bank ended up in the PBoC control, while another 7 % stake went to the provincial government. The state is wiping 150 billion yuan (nearly 20 billion euros) of assets from the bank’s balance sheet and providing an additional 75 billion yuan in long-term credit. Moreover, a listed trust company Anxin also is also being restructured. Media reports suggest that Anxin will end up in Bank of China’s control.

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