Chinese non-performing loans (NPLs) and late payments are on a rapid ascent as economic fears continue to mount.
80% of Chinese companies are experiencing overdue payments, as suppliers across industries struggle with meeting their commitments.
At the same time, NPLs in the country are spiralling out of control, with the government seeking measures that seem increasingly desperate to try to curb the trend.
Coface’s data shows that in the first three quarters of 2015, Chinese NPLs rose by more than 50%. In January, Reuters cited sources within government to say that new NPLs more than doubled over the course of the year. The official NPL ratio is 1.59%, the highest since 2009.
China has for years engaged in practices designed to hide bankruptcies, as well as corporate debt. The government has often been accused of bailing out bankrupt state-owned enterprises and obfuscating data to camouflage mounting levels of overdue debt.
Coface’s survey of 1,000 Chinese companies will raise further concern as to the health of China’s economy, amid downward pressure on the renminbi and fears over the stock market. The insurer predicts growth of 6.5% this year, below the government’s targets and below what many other analysts are forecasting.
Speaking to GTR on the veracity of Chinese GDP data, Julian Evans-Pritchard, China analyst at Capital Economics, said that his company has had to design a metric of its own due to doubts over official figures. He is forecasting real GDP growth of around 4%.
The actions of the Chinese administration in recent weeks would suggest that it shares those concerns, and that it is looking for new ways to fix things.
Last week, it was reported that the People’s Bank of China (PBOC) is set to offer commercial lenders the chance to swap Chinese NPLs for equity stakes in the banks. The aim of the plan would be to free up the commercial banks’ balance sheets ready for a fresh batch of lending, as China looks to turn towards further fiscal stimuli.
In another, far more controversial move, regulators have allowed domestic banks to issue bonds worth up to US$7.7bn backed by securitised Chinese NPLs. It followed an attempt to allow banks to repackage and resell receivables, which failed as banks were keen to hold on to the assets on their balance sheets that were actually performing.
The word “securitisation” has gradually crept back into trade finance parlance, after it was sullied in the financial crisis, when mortgages which never stood any chance of being repaid were bundled together and sold to investors. In recent years, banks such as BNP Paribas and Commerzbank have created solutions to allow secondary investors to buy into bundled trade finance loans, which are considered to be relatively low risk.
The construction sector appears to be the most at risk and the situation is deteriorating rapidly. 28.3% of the sector’s credit sales in overdue are over by more than 150 days. Coface report
However, the Chinese government’s efforts to interest the capital markets are said to have been greeted with disdain by bond traders. Bloomberg reports that “bond traders at Chinese banks say they’ll avoid notes backed by the nation’s highest non-performing loans in a decade”.
If China’s growth decline has been dramatic, then the shrinkage of its banking sector has been nothing short of spectacular. In 2011 the industry was gowing at 39.5% per year, a figure which had decreased to just 2.3% in 2014. The data for 2015 are not yet available, but are unlikely to make for pleasant reading.
Unsurprisingly, in the Chinese NPLs and late payments space, Coface singles out the construction and metals sectors as being the worst offenders.
“The construction sector appears to be the most at risk and the situation is deteriorating rapidly. 28.3% of the sector’s credit sales in overdue are by more than 150 days and 57% of the sector’s respondents have more than 2% of their turnover impacted by overdues of more than 6 months. Metals and IT report, respectively, 13% and 15.2% of overdue credit sales of more than 150 days – while telecoms are also under pressure,” the report reads.
Given the Chinese government’s decision to close swathes of steel mills and coal mines in the past month, this situation is highly unlikely to improve. Worse again, the Chinese job market is set to be flooded with hundreds of thousands of layed-off workers.
In his annual speech yesterday at the National People’s Congress, Premier Li Keqiang vowed to create 10 million new jobs in 2016, and to also “address the issue of zombie firms using mergers, reorganisations, bankruptcies and debt restructurings”.
His success in pursuing such strategies will define the health of China’s trade economy over the coming year.