China's Troubled Credit Swells to Sweden-Sized $628 Billion

Marble lion in front of China Banking Regulatory Commission

Marble lion sits in front of China Banking Regulatory Commission (CBRC) building.

Photographer: Zhang Peng/LightRocket via Getty Images
  • Banks' profit growth for first 9 months slumps to 2% from 13%
  • Latest bank data coincides with Shanshui Cement debt crisis

Chinese banks’ troubled loans swelled to almost 4 trillion yuan ($628 billion) by the end of September, more than the gross domestic product of Sweden, according to figures released by the industry regulator.

Banks’ profit growth slumped to 2 percent in the first nine months from 13 percent a year earlier, according to data released on Thursday night by the China Banking Regulatory Commission.

The numbers come as a debt crisis at China Shanshui Cement Group Ltd. prompts lenders including China Construction Bank Corp. and China Merchants Bank Co. to demand immediate repayments and as weakness in October credit growth shows the risk of a deeper economic slowdown.

While the official data shows non-performing loans at 1.59 percent of outstanding credit, or 1.2 trillion yuan, that rises to 5.4 percent, or 3.99 trillion yuan, if “special mention” loans, where repayment is at risk, are also included.

The amount of bad debt piling up in China is at the center of a debate about whether the country will continue as a locomotive of global growth or sink into decades of stagnation like Japan after its credit bubble burst.

‘Evergreening’ Debt

“Evergreening,” which is when banks roll over debt that hasn’t been repaid on time, may contribute to the official bad-loan numbers being understated. The Bank for International Settlements cautioned in September that China’s credit to gross domestic product ratio indicated an increasing risk of a banking crisis in coming years.

Bad-loan provisions, shrinking lending margins and weakness in demand for credit are eroding banks’ profits just as financial deregulation boosts competition. Ramped-up stimulus, with the central bank cutting interest rates six times in a year, failed to prevent the nation’s broadest measure of new credit slumping to the lowest in 15 months in October.

— With assistance by Jun Luo

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