For some time I have been going on about the huge amount of non performing bank loans (NPL’s) in the Chinese banking system link1. The Chinese response to the 2008-2009 global financial meltdown was to go on an unprecedented public spending binge. The aim was simple to keep up employment and economic growth so as to make sure unemployment did not rise which could lead to discontent on the street that would threaten the communist/elite power stranglehold over the economy and country.
The problem was that a lot of this money was wasted, building new cities that are seriously under populated, shopping malls with insufficient shoppers and infrastructure projects with minimal and in many cases a negative pay-off. The result is a massive amount of debt creation in the system some 282% of GDP in 2014 having been just 158% of GDP in 2007. A fair amount of it that cannot be serviced link2. The result is then simply a load of non performing loans in the banking system and also in the shadow banking system estimated at $6 trillion link3 in China link4.
The need to preserve capital against these NPL’s means that Chinese banks can no longer easily extend credit and this is one of the reasons for the Chinese slowdown. Of course, the other reason for the Chinese slowdown is huge overcapacity as a result of over-investment in the past. So finally the government is beginning to recognise the huge mess all this state directed lending has caused and the announcement today of what is the first step in a major bank bailout. The government will take on some of the NPL’s in exchange for equity in the banks. Here is a link to the Bloomberg story link5. The official stats suggest $600 billion of NPLs but I would treble that and put the true figure in the region of $1.8- $2 trillion that is one hell of a mess to sort out. This is not something that can be sorted out in a month or two – it is going to take 4-5 years and in the meantime bank shareholders in China need to be extremely weary as they risk huge dilution as the State will want shares in return for the bailout.
