Breakingviews - China's banks have a nasty case of indigestion

Robyn Mak - Reuters - 11/09
China's financial sector has serious heartburn. For decades, Beijing has leaned on its state-controlled banks to turbo-charge growth by extending credit. But lenders are now clogged with risky assets. The result is something like indigestion: not critical, but painful for the $17 trillion economy.
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HONG KONG, Sept 11 (Reuters Breakingviews) - China's financial sector has serious heartburn. For decades, Beijing has leaned on its state-controlled banks to turbo-charge growth by extending credit. But lenders are now clogged with risky assets. The result is something like indigestion: not critical, but painful for the $17 trillion economy.
On paper, the country's banks look remarkably healthy given 2020's twin shocks of the pandemic and a burst property bubble. Official data, opens new tab show them sitting on 3.3 trillion yuan, roughly $460 billion, of non-performing loans. Add in another $670 billion of less-problematic-but-still-pesky "special mention" loans, which include credit extended to struggling property developers and cash-strapped local governments, and it doesn’t even reach 4% of their aggregate lending.
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The problem is, asking China’s official data collectors about bad debt is like asking a dyspeptic patient how much junk food they really eat. Other sources take a gloomier view. Bad loans in the property sector today alone could be over $1 trillion, reckons research firm GavekalDragonomics.
Even so, the chances of a chaotic implosion of China's tightly-controlled financial system are extremely low. China's four biggest lenders - Industrial and Commercial Bank of China (601398.SS), opens new tab, (1398.HK), opens new tab, Bank of China (601988.SS), opens new tab, (3988.HK), opens new tab, China Construction Bank (601939.SS), opens new tab, (0939.HK), opens new tab and Agricultural Bank of China (601288.SS), opens new tab, (1288.HK), opens new tab - are all state owned and too big to fail in every way. Moreover, regulators and bank executives have spent years devising ways to manage the bad debt problem, and while that system is strained, it still more or less works.

THREE-COURSE PROBLEM

Think of the sector's problem assets as coming in three distinct flavours. The least unpalatable are loans are mostly politically connected ones from local government financing vehicles, or LGFVs - the 3,000-p...
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