Beijing: Chinese banks may struggle to recoup about 23 per cent of the 7.7 trillion yuan ($4.04 trillion) they've lent to finance local government infrastructure projects, according to a person with knowledge of data collected by the nation's regulator.
About half of all loans need to be serviced by secondary sources including guarantors because the ventures can not generate sufficient revenue, the person said, declining to be identified because the information is confidential. The China Banking Regulatory Commission has told banks to write off non-performing project loans by the end of this year, the person said.
The estimate implies $261 billion of debt may go sour, almost five times the $53.5 billion the nation's five largest banks are raising to replenish capital. China's banks advanced a record $1.4 trillion of credit last year to support the economy, raising concern that bad loans will surge and force the government to add to the more than $650 billion spent to clean up the banking industry since 1999.
"Unfortunately this smells just like deja vu of China's last banking crisis a decade ago," said Shen Minggao, Hong Kong-based head of China research at Citigroup. "Non-performing loans will increase as a result of last year's lending spree, which to a certain extent was a delayed form of fiscal spending, and eventually the central government will step in and share the costs."
Decades of state-directed lending to unprofitable government companies and projects saddled China's banking system with a non-performing loan ratio of more than 50 per cent, according to a 2002 estimate by Standard & Poor's. Government bailouts helped bring the industry's bad loan ratio to a low of 1.3 per cent by June 30.
Local governments set up the financing vehicles to fund projects such as highways and airports due to limits on their ability to directly borrow money. The central government this year restricted borrowing on concern money is not being used for viable projects.
The number of non-performing loans to such vehicles likely will not be "too high" at the end of this year as most such credits, many issued last year, are long-term debts, said Sanford C Bernstein & Co analyst Michael Werner.
