Is the global financial crisis catching up with China? The credit bubble that swallowed the developed world may be seeping into the red dragon. Non-performing loans are on the rise, with the country's top banks reporting an increase in of more than 6 percent:
According to Caixin Magazine, Chinese banks have reported 385.97 billion yuan ($60.25 billion) in non-performing loans (NPLs) since the beginning of 2011.
Yesterday, 14 of China's large commercial banks posted their results for the first half of 2011. Of those 14, 11 reported an increase in non-performing loans. Of those 11, 8 reported non-performing loans had increased over 10% since June of last year...
The worst two offenders were the Industrial and Commercial Bank of China, which led by the largest amount at 108.2 billion yuan in NPLs, (up 5.7 percent from the beginning of the year) and Bank of China. BOC lead in terms of percentage, in the first half of 2011 their NPLs jumped 10.13%.
Despite attempts to curb “hot money”, Chinese companies have been borrowing record amounts through Hong Kong:
Financial institutions’ claims on mainland companies rose four-fold to 1.6 trillion yuan ($250 billion) between mid-2009 and the end of May, Hong Kong Monetary Authority data show. They will provide another 700 billion yuan to 1 trillion yuan of loans to mainland firms in the second half of 2011, according to Fitch Ratings. The money isn’t included in the central bank’s estimate of total lending in the economy. China’s loans fell to their lowest level in a year in July.
Chinese policy makers have introduced loan quotas and higher reserve requirements in their bid to curb inflation, which quickened to 6.5 percent in July, compared with 3.6 percent in the U.S. and 2.5 percent in the euro region. While All-China Federation of Industry & Commerce said in June that smaller businesses are more short on cash than during the 2008 financial crisis, companies that have access to international financing are still able to get the money through banks.
“If you borrow in Hong Kong it’s a hell of a lot cheaper than in the mainland,” Jim Antos, a banking analyst at Mizuho Securities Asia, said in a telephone interview from Hong Kong on Aug. 10. “The money is easily repatriated or sent to China.”
Some estimates put China's underground banking system at $470 billion:
China's smaller private companies, starved of loans as the country tightens credit to fight inflation, are driving an underground banking boom by turning to unofficial sources for funds to stay in business. Some are even becoming lenders, given the prize of high returns.
About 3 trillion yuan (US$470 billion) of bank loans have been channeled into underground lending in the eastern coastal provinces, China Banking Regulatory Commission chairman Liu Mingkang told a recent closed-door conference with lenders.
Large, usually state-owned enterprises, can get bank loans at a 7.2% interest rate, compared with the one-year benchmark interest rate of 6.56%. Through third-party companies such as financing firms, they can then lend the money on at higher rates to small and medium-sized companies, Liu said, according to a copy of his speech obtained by Securities Times last week.
The lack of transparency has led to shady accounting practices. Problems have plagued Chinese firms including Sino-Forest, whose stock was halted after accusations of fraud. Another company facing fraud accusations, Longtop Finanical Technologies, is under investigation by the SEC.
Even in China's rapid infrastructure push, cracks are appearing:
In recent weeks, several reports of shoddy workmanship on low-income housing have appeared in state media, raising concerns about safety and suggesting that the flagship project may have to proceed more slowly than expected.
"If low-income housing construction is blindly devoted to speed, then like the frequent accidents we've seen recently, problems will keep occurring...and potentially even end in tragedy," said an article in the People's Daily, the official mouthpiece of the Chinese Communist Party, on July 27.
The article appeared just days after the July 23 high-speed train accident that killed 40 people and injured almost 200 near Wenzhou in eastern China. The accident gave rise to a wave of popular anger and accusations that the new rail network had been developed too quickly and without enough focus on quality and safety.
At the other end of the spectrum, high-income housing has suffered from a sharp drop in demand leading to entire cities being left empty:
Many Chinese are blaming Beijing for mishandling their foreign reserves. Meanwhile, Fitch is warning of a downgrade to China's debt.
Some analysts believe that the Chinese economic bubble is getting ready to burst and that the unrepairable problems may lead to a 1997-style crash. The catalyst could be a long list of Chinese “shell companies” that have become easy targets for short sellers.