People’s Bank of China governor Zhou Xiaochuan isn’t concerned about a build-up of non-performing loans within his country’s banking sector despite reports suggesting a renewed bout of credit mismanagement threatens to undermine recent reforms.
“Commercial banks also make a lot of money, profit, and they have provisions. If the provisions can cover the non-performing loans it’s OK for the banks,” Zhou said in an exclusive interview with Emerging Markets.
“Especially for China the credit market is not so mature, the market conditions are not yet so perfect so a small percentage of new NPLs should be normal,” he continued.
An Ernst & Young report this week claimed that China’s NPL problems are “far from over” and that the overheated property prices will cause a renewed flood of bad debt. The IMF published another analysis in March suggesting the four big state-owned Chinese banks have continued their failure to adequately assess risk in making lending decisions in recent years.
Zhou countered by saying that as long as the bad loans remain below 5 or 10% of profit, as he stressed they do in China, banks can use their provisions and avoid any difficulties. With the Chinese economy expected to continue growing at near 10% in coming years new profitable loans will dilute the legacy of past mistakes. The situation is “tolerable,” the governor emphasized.
Nor is this just wishful thinking from the authorities, according to UBS chief Asian economist, Jonathan Anderson, who warns that it’s all to easy to be beguiled by the enormous numbers linked to China’s exposure to NPLs. The Ernst & Young report calculates $845 billion of credit may be affected but a clear majority of this has already been transferred to state-owned asset management companies and a large chunk of the rest lies with the Agricultural Bank of China, the only remaining “big four” bank as yet untouched by NPL reforms.
“They’ve been cleaning up at a fantastic rate, putting hundreds of millions of US dollars into clearing NPLs out of the system, things are a lot better than they used to be,” Anderson claims.
Zhou vowed to build on this progress by purging the Agricultural Bank’s balance sheet though not before the fundamental flaws which originally allowed the bad loans to build up have been addressed.
“It’s in our plan but whether we can do it very soon or not is dependent on many elements, it’s the preparations, it’s the external audit, it’s seeing whether they have already improved well enough their internal controls, all of these things,” he said.
China has plenty more to do. The IMF’s Asian deputy director Wanda Tseng this week renewed the multilateral’s warning about the need for further progress and as Zhou himself noted, “if economic cycles go into a downward direction it’s a big test to the commercial banks.”