Massive Wave of Bad Debt Crushes China’s Biggest Banks

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In Brief
  • Chinese banks have seen record levels of bad debt after the coronavirus crisis.

  • Additionally, the government has forced banks to lend to business, creating a credit crisis.

  • Globally, banks are facing similar crunches as liquidity and bad debt collide.

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A crushing wave of bad business loans has created a perfect storm for China’s largest banks.

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The top four banks in the nation posted reductions in profit of at least 10%, and the top 1000 banks saw reductions of 25% on average.

The leading cause of the profit reductions is the failure of business loans. Non-performing loans reached 2.7 trillion yuan.  This is more than 5% of the total Chinese banking industry, currently valued at 45 trillion yuan.

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China’s COVID-19 Crisis Crunch

The banking industry in China came under the greatest pressure during the COVID-19 crisis. As businesses were forced to shutter to protect public health, owners were unable to make good on business loans.

However, in an effort to keep the economy afloat, the Chinese government required banks to lend capital, even at high risk. This led to a fiscal crunch between new debt and unpaid debt, resulting in substantial losses. Citigroup analysts, led by Judy Zhang, said,

Under mounting political pressure, China banks not only have had to further cut loan yields to subsidize the real economy, but also need to accelerate counter-cyclical provisioning and adopt more conservative NPL assumptions in setting provisions.

In the final analysis, Chinese banks may see a net loss of 25% in 2020, the single greatest reversal in Chinese banking history.

Global Banking Troubles

While banking stocks around the world may be relatively strong in comparison, the overall sentiment is still downbeat. Many banks, including HSBC and JPMorgan, have suggested the crisis has caused a substantial impact on the banking industry.

These reflect a wider concerns that the banking system as a whole, including central banks, may be in for trouble. The stimulus activity of most nations has apparently staved off liquidity crises, but the underlying problems remain.

In response, the U.S. Federal Reserve (Fed) has pivoted to allow for greater inflation and therefore greater liquidity. This has also been coupled with widespread quantitative easing and zero percent benchmark lending rates.

Together, the response seeks to push capital into the pockets of the banks, with the anticipation that they’ll have the necessary liquidity to lend to business owners.

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With a background in science and writing, Jon's cryptophile days started in 2011 when he first heard about Bitcoin. Since then he's been learning, investing, and writing about cryptocurrencies and blockchain technology for some of the biggest publications and ICOs in the industry. After a brief stint in India, he and his family live in southern CA.

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