Chinese banks start new year with old bad habits

February 16, 2016

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Chinese banks have started the New Year with some familiar bad habits. The country’s lenders dished out a hefty 2.5 trillion yuan ($385 billion) in new loans in January as the central bank pumped cash into a slowing economy. The problem is that adding to the country’s already-large pile of borrowing will only make the eventual cleanup even more painful.

Even though Chinese banks tend to be more generous at the start of the year, the January bonanza was striking. New lending was more than 1 trillion yuan higher than in the first month of 2015 and accounted for most of the overall increase in credit.

There are several possible explanations. One factor is that liquidity is relatively abundant: though the People’s Bank of China is reluctant to cut interest rates, it has injected plenty of cash into the financial system to counter capital outflows. Chinese companies are also borrowing at home to replace foreign-currency debt. Renewed confidence in China’s reviving property market may also have revived appetite for leverage.

However, China can ill afford a new credit splurge. By some estimates, total debt is approaching 250 percent of GDP. Official growth slowed to 6.9 percent in 2015, and nominal output expanded even less due to falling prices. That means relatively small increases in borrowing add to the overall burden. Yet commercial bank loans grew 12 percent to 72 trillion yuan last year, according to figures from the China Banking Regulatory Commission.

The real worry is that a sizeable chunk of lending might effectively be involuntary, as banks offer new loans to prevent already troubled borrowers from defaulting. The stress is showing. Loans officially classed as non-performing jumped by 51 percent last year, according to the CBRC. So-called “special mention” loans, which could potentially go sour, rose 37 percent. Together, the two categories of dodgy credit now amount to 5.5 percent of total lending.

By expanding the denominator in that ratio, January’s loan boost will make the bad debt problem look less severe for a while. Like the overall economy, however, Chinese banks cannot lend their way out of the country’s debt burden. Time for some new resolutions.

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