China’s lawmakers issue rare warning over banks’ asset quality due to inflated, inaccurate data

China’s lawmakers issued a rare warning about the asset quality at small and medium-sized financial institutions, as their figures do not “truly reflect the actual situation” and such actions could derail Beijing’s de-risking campaign.

During a meeting of the Standing Committee of the National People’s Congress (NPC) in October, deputies called for more interventions to speed up the disposal of bad loans at small and regional financial institutions.

“The data of some small and medium-sized financial institutions is too inflated and does not truly reflect the actual situation,” according to the minutes of the meeting, which were only released on Wednesday.

“It is recommended that the central financial regulatory authorities promptly identify existing risks, accelerate the disposal of non-performing assets, consolidate capital, improve risk prevention capabilities and enhance its corporate governance structure.”

The who, what and how of China’s new financial watchdog

The meeting of China’s top legislature reviewed a State Council report on financial work presented by People’s Bank of China governor Pan Gongsheng.

China’s financial system – especially small regional banks – has been plagued by a prolonged property slump and rising local government debts in the past year.

Beijing raised “preventing and resolving financial risks” as one of its primary missions last year during the tone-setting annual central economic work conference.

The non-performing loan (NPL) ratio of all of China’s commercial banks was 1.61 per cent at the end of September, according to the National Administration of Financial Regulation.

China’s NPL ratio – lending that is subject to late repayment or is unlikely to be repaid in full – stood at 1.66 per cent at the end of September last year.

It can represent a major challenge for the banking sector as they reduce profitability.

The ratio for urban commercial banks during the same period was 1.91 per cent, while the ratio for rural banks was 3.18 per cent, compared to the 1.27 per cent for state-owned institutions.

Everyone knows that the quality of many loans issued during the Covid-19 pandemic can be problematic

Ding Shuang

Ding Shuang, chief Greater China economist at Standard Chartered Bank, said the NPL ratio far from reflected the actual quality of banks’ assets because many bad loans have been evergreening.

Evergreening involves extending new loans or providing additional credit to borrowers struggling to repay existing debt.

“These [evergreening] loans are not included in the NPL calculation. But everyone knows that the quality of many loans issued during the Covid-19 pandemic can be problematic,” Ding said.

During October’s meeting, lawmakers also called for risks associated with debts in the real estate sector to be addressed, with more action needed to prevent financial corruption.

[It is necessary] to further improve the internal management of the financial system, and effectively prevent corruption in the financial field

Standing Committee

“When some large real estate companies default on their debts, we should not only look for problems with the company’s own operations and management, but also look for problems with inadequate internal management or even corruption in relevant financial institutions,” they said, according to the minutes of the meeting.

“[It is necessary] to further improve the internal management of the financial system, and effectively prevent corruption in the financial field.”

Authorities should also increase financial support for unfinished, pre-sold homes, while supporting the reasonable financing needs of real estate companies and reducing their risk of credit defaults.

The NPC delegates also said that the effect of monetary policies on stimulating investment had been declining this year, with the money largely circulating among banks and big firms, without being channelled to small and medium-sized enterprises.

“It is recommended that the People’s Bank of China seriously study the financing difficulties of private small, medium and micro enterprises and come up with specific methods to effectively solve this problem,” the lawmakers added.


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