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April 9, 2014, 1:03 a.m. EDT

China banks face rising bad loans

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By Wu Hongyuran

BEIJING ( Caixin Online ) — Bad loans have sharply increased for many Chinese banks as more companies struggle to make repayments, data from recent bank annual reports show.

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The total value of non-performing loans at 12 major banks was 467 billion yuan on Dec. 31, an increase of 76.3 billion yuan ($12.3 billion), or 19.5%, from the beginning of 2013.

Earlier data from the regulator show the entire banking industry’s bad loans increased by 99.2 billion yuan last year to 592.1 billion yuan, with the average non-performing loan ratio reaching 1%, compared with the 0.95% a year earlier.

The total amount of bad loans may have increased by another 60 billion yuan in the first two months of this year, an executive of a large bank said.

More are expected to emerge in the second quarter, he said. The regulator has issued a notice to its regional offices and major financial institutions that requires them not to hide toxic assets or be in a hurry to call in loans, thus forcing more borrowers into liquidity problems, bankers with knowledge of the requirements said.

“Bad loans in general are showing signs of spreading and contagion,” a senior banking analyst said. “In 2012, they were concentrated in relatively small industries such as trading companies. The next year, they spread to big ones and big enterprises.”

“Bad loans in general are showing signs of spreading and contagion”

senior banking analyst

Among the defaulters were subsidiaries of big state-owned enterprises (SOEs), which banks normally view as safe clients, a loan officer at a joint-stock bank said. In many cases, he added, the parent SOEs did not save their subsidiaries, mostly because they were in deep trouble themselves.

Data from the China Iron and Steel Association, a trade organization, show that the debt-to-asset ratios of many of country’s major steel-producing and trading companies, most of them SOEs, have passed the 70% red line.

The association’s data also show that at the end of last year, the top 86 steel manufacturers and traders in the country owed banks 1.33 trillion yuan and other creditors another 1.76 trillion yuan.

There is no consensus about the value of the loans that cannot be repaid. A source close to the banking regulator said it was 1.5 trillion yuan, with large SOEs especially indebted.

Coal miners are also struggling. The industry’s average debt-to-asset ratio at the end of last year was more than 64%, data from trade group China National Coal Association shows. The organization also says that the large colliers, mostly SOEs, lost a combined 40.6 billion yuan in the first 11 months of 2013, up nearly 81% from the same period the previous year.

Experts attributed the woes of many coal miners and steel companies as much to the slowing economy as to their unwise investments in other fields. It has been reported that many steel traders ran into trouble because they used banks to trade stocks and invest in properties in hopes of making quick cash.

The current size of bad loans is still controllable, but it is set to rise, and certain sectors will face more pressure than others, said Zeng Gang, director of the Banking Research Office at the Chinese Academy of Social Sciences.

The non-performing loan ratio of some small banks in the Yangtze River Delta, Pearl River Delta and the coastal regions near the Bohai Sea in the northeast has reached up to 4%, he said.

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