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Chinese banks have world’s lowest rate of bad loans

By Ni Tao: 0 Comment(s)Print E-mail Shanghai Daily, May 20, 2014

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A citizen fixes his eyes on the sand table model at a real estate exhibition in Nanning, Guangxi Zhuang Autonomous Region, on May 1, 2014. [Lu Boan/Beijing Review]

Editor's note: China’s astronomical home prices have been steadily falling in a dozen cities for four consecutive months. Will the price cuts herald a crash in home prices? If so, can China’s banks withstand the shock waves? And since many local governments rely on the property sector, how can they service their debt without resorting to land sales? Chen Baizhu, academic director of University of Southern California—Shanghai Jiao Tong University Global EMBA program in Shanghai, discussed these issues with Shanghai Daily reporter Ni Tao.

Q: The Peterson Institute, a US think tank, recently released a research suggesting that even if home prices in China drop by 50 percent, commercial banks will withstand the impact. Do you agree?

A: You have to go to the basic statistics. If you look at the major banks, some of the banks, the Big Five, and all those shareholder banks, like the Bank of Shanghai and the Bank of Beijing, they are pretty healthy.

Their non-performing loans (NPL) are very low, even lower than all the major banks in the world. Based on the NPL statistics, Chinese banks are the healthiest in the world.

But there are more localized banks at a lower level. These banks may have a problem. You are talking about housing prices. To give you an example, for the Bank of Shanghai, housing loans represent a rather small percentage of its loans. The majority of its loans are for businesses, small- and medium-sized businesses which tend to be rather resilient and are the growth engine.

I don’t know where the statistics come from, the 50 percent drop in home prices, I don’t know what is the rationale behind the conclusion.

Certainly the assumption that housing prices will drop 50 percent is itself debatable. But given the level of NPLs of Chinese banks, the falling housing price will have a smaller impact on the Big Five as well as shareholders. But for smaller banks, they will have an impact.

There is a lot of talk about this so-called shadow banking in China. An estimate is that shadow banking loans, the so-called trust, are 7 trillion yuan (US$1.12 trillion). Not all the loans are bad, some of them will be bad. My view is that some of the shadow banks will go bankrupt and so be it. Wealthy people who engage in shadow banking need to learn the risk.

From the government perspective, I think the government needs to isolate the problem of shadow banking, so we can carve out the problem, contain the risk within the limited scale, so that it won’t affect other parts of the financial institutions. Shadow banking will then be a manageable crisis.

Q: Will the authorities intervene to prevent a crash in home prices?

A: I don’t think the government, including the national government, would leave the market as it is.

The macroeconomic policy and the monetary policy would adjust so that there will not be a big crash in the Chinese market. Recently, the People’s Bank of China required that banks cannot refuse to give loans if it is a first-time buyer and if the buyer satisfies the criteria.

That is a signal, and the government has already taken the signal into account.

They think the situation in some places is quite serious, and they have already signaled their willingness to loosen monetary policy a little bit.

From the local government perspective, they have an incentive to drive up land and property prices.

And from the national government perspective, it will adjust monetary policy. It may even lower the reserve ratio, I don’t know if it is going to happen, but it is a possibility.

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