Bank of Jiujiang, a mid-level loan specialist from a southern Chinese river town, conferred some terrible news on 19th March. In a rare divulgence, it informed that financial backers dividends for 2023 could fall by 30%, in light of ineffectively performing credits. This is only the kind of data Chinese banks are ordinarily hesitant to uncover. For sure, they frequently take incredible measures to abstain from doing as such.
Normally, the trick fills in as follows: the bank loans to a resource, the Asset Management Company (AMC), that consequently buys its toxic credits. The agreements drawn up between the two gatherings incorporate expectations that empower the AMC to stay away from the credit dangers of the terrible advances they are purchasing. Privacy statements hold these game plans back from being revealed, once in a while even to courts.
With China’s bad debt ratio soaring, hundreds of banks have become ticking time bombs. This may cause a serious problem for China on financial front. As China’s economy deteriorates the country’s banking sector faces a growing crisis. Reports indicating that bad debts have surged in hundreds of banks. A prime example of this troubling trend is Jiujiang Bank located in Jiangxi province. The bank recently released a performance forecast predicting a 30% decrease in net profit for 2023 compared to the previous year. Chinese media report reveal that Jiujiang bank’s non-performing loan ratio has been rising for two consecutive years exceeding 2% in the third quarter of last year, while its provision coverage ratio has been declining. According to data from enterprise as of September 2022 the bank’s non-performing loan balance stood at 6.86 billion Yuan, approximately 9665 million US dollars, with a non-performing loan ratio of 2.27% and a provision coverage ratio of 133.63%.
The Economist reported that Jiujiang bank’s disclosure of its expected profit drop due to poor loan performance is an unusual move as Mainland Banks typically avoid revealing such information. The report also sheds light on the practice of banks control by the Chinese Communist Party lending to AMC to address their non-performing loan issues. However, the confidentiality clauses in these transactions prevent the public and even the courts from accessing the details allowing banks to conceal the true extent of their bad debt problems. Experts from the National University of Singapore business school and Renmin University of China warned that these bad loans will continue to accumulate posing a significant threat to hundreds of Chinese Banks.
Jiujiang Bank’s bad debts, for instance, have increased Seven fold between 2015 and the end of 2022.The rise in non-performing loans is not limited to Jiujiang bank. In December 2022 China CITIC bank and the Agricultural Bank of China were fined 220 million Yuan about 33.84 million US dollars. This increase in non-performing loans is weakening the balance sheets of financial institutions making it more difficult for the CCP government to provide direct fiscal support to favoured Industries. To address the bad debt problem, the CCP established for centrally controlled AMC’s decades ago. In 2016 the State owned AMC’s purchased nearly 1 trillion Yuan, about 157 billion US dollars. Based on the current exchange rate of bad debts it comes to a total of 1.5 trillion Yuan, about 226 billion US dollars, in non-performing loans.
However, by 2022 they only acquired less than 50 billion Yuan of bad debts i.e. 7.8 billion US dollars, based on the current exchange rate, whereas the scale of non-performing loans surged to nearly 3 trillion Yuan approximately 470 billion US dollars. The planned merger of 3 AMC’s with the CCP’s sovereign wealth fund as reported by state media in January 2023 underscores the financial difficulties faced by these institutions.
China is grappling with a daunting debt burden, which poses a grave threat to its economy. The country’s debt-to-GDP ratio reached an alarming 288% in 2023, surpassing most developed economies. This unsustainable mountain of debt stems from real estate woes, overbuilding, falling prices, and defaults by Chinese borrowers. Unlike other nations, China’s debt has surged rapidly relative to its economic size, making it hard to manage. As the crisis deepens, the delicate balance between addressing foreign loans and managing domestic debt remains precarious. The dragon’s financial stability hangs in the balance, and decisive action is imperative.