You are here: China > Government > SCIO Briefings >

SCIO briefing on China's debt ratio

: 0 Comment(s)Print E-mail China.org.cn, June 25, 2016

Adjust font size:

Speakers:
Mr. Sun Xuegong, Deputy Director General of Fiscal and Financial Department of the National Development and Reform Commission;
Mr. Wang Kebing, Deputy Director General of the Budget Department of the Ministry of Finance;
Madam Ruan Jianhong, Deputy Director General of Statistics Department of the People’s Bank of China;
Mr. Wang Shengbang, Deputy Director General of Prudential Regulation Authority of the China Banking Regulatory Commission;
Mr. Bao Xiangming, the Secretary-General Assistant of the National Association of Financial Market Institutional Investors.

Chairperson:
Xi Yanchun, vice director-general of the Press Bureau, State Council Information Office

Date:
June 23, 2016

Asahi Shimbun:

I want to invite Mr. Wang from the China Banking Regulatory Commission (CBRC) to answer my question regarding the bad loan rate. David Lipton from the International Monetary Fund (IMF) once said that the potential losses for Chinese banks’ corporate loan portfolios could be equal to about 7 percent of the GDP. This figure is different from what you have just mentioned about the rate. He also indicated this was a conservative estimate excluding potential problem exposures in the “shadow banking” sector. There is hence widespread concern whether or not the bad loan rate is actually higher. How could we have a full understanding of the risks in China’s banking industry?

Wang Shengbang:

Mr. Lipton indeed said these things during his visit to China. According to the Global Financial Stability Report published this April by the IMF, the potential losses for Chinese banks’ corporate loan portfolios could be equal to about 7 percent of the GDP. Just now, I have made it clear that it still needs further discussion whether this evaluating method is proper or scientific. We think the IMF overestimated the risks in China’s banking industry. The IMF’s estimation was based on the interest coverage ratio. If the interest coverage ratio of a company is less than 1, its debts will be considered to be loans potentially at risk. Based on that, the IMF assumed a 60 percent loss ratio on these kinds of risky loans. However, the interest coverage ratio is a measure of a company’s ability to honor its short-term debt payments. It has high volatility, and the IMF consulted the data from last year. Recently, we have carried out monitoring work among a sample of listed companies based on this measure. It turns out that these companies’ interest coverage ratio has improved. If we follow the IMF’s method, we should have a lower potential bad loan rate; however, there is actually no significant change. This is one reason.

As for the second reason, the IMF worked out the loss ratio for Chinese banks according to the western credit structure. Assuming a higher potential loss ratio of 60 percent, the IMF doesn’t take into full consideration the structural characteristics of the credit business in Chinese commercial banks. With the secondary source of repayment accounting for a larger proportion, 70 percent of the corporate loans are secured against guarantees in China, which is not the case with general bonds. If bonds are issued and the company defaults on its bonds, that will mean a complete loss; however, when dealing with loans, we can prosecute guarantors and enforce the right of the mortgagee. So, the IMF overestimated our loss ratio.

In addition to loans, there are other risks. I know that people are very concerned about the so-called “shadow banking,” which we define as loans made outside the formal banking sector. We have been closely tracking and monitoring its development, and the CBRC also established a report system this year to require banks to provide more detailed data about their non-credit business. In recent years, we have carried out a large number of on-site inspections at those institutions which have seen faster business growth or whose business is rather complicated. We have found some common problems. In 2014, the People’s Bank of China (PBC), the CBRC, the China Securities Regulatory Commission (CSRC), the China Insurance Regulatory Commission (CIRC) and the State Administration of Foreign Exchange (SAFE) jointly issued a notice on regulating interbank business to further regulate the interbank transactions of financial institutions. According to the CBRC rules on capital management and liquidity management, when conducting interbank business, a financial institution shall be subject to capital and liquidity constraints, and comply with the requirements of accounting standards to set aside provisions for impairment. As for the investments recorded off the balance sheet, we follow our current practice that a financial institution should set aside capital reserve as long as it takes credit risks. Moreover, we make corresponding liquidity requirements. As the country’s several ministries jointly issued the notice to regulate interbank businesses, we have seen increasingly improving regulation in these transactions during the past two years. Thank you.