China Bad-Loan Issue Not as Bad as Bass Makes Out, CICC Says

Updated on
Value Investing Congress

Kyle Bass.

Photographer: Jonathan Fickies/Bloomberg
  • Most that banks could lose is about $1.5 trillion: CICC
  • Hayman Capital's Bass had earlier flagged $3.5 trillion loss

China’s bad-loan problems are “not as serious as” Hayman Capital Management’s Kyle Bass claimed earlier this month, according to China International Capital Corp., the investment bank Morgan Stanley helped create in 1995.

QuickTake China’s Debt Bomb

While the nation’s reported bad-loan ratios may not reflect the actual risk level lenders will face in the future, 10 trillion yuan ($1.5 trillion) is the most that banks could lose from soured credit in an economic hard-landing scenario, CICC analysts led by Mao Junhua wrote in a note on Sunday.

That’s less than half the $3.5 trillion potential loss flagged by Bass, the hedge fund manager who successfully bet against mortgages during the subprime crisis. Bass’s estimate was based on the possibility of China’s banking system shedding 10 percent of its assets because of nonperforming loans, the investor wrote in a letter to investors obtained by Bloomberg.

Are China's Banks in Danger of Blowing Up?

“Bass’s estimate could be too large” as it implies a true bad-loan ratio for China banks at 28 to 30 percent, Larry Hu, a Hong Kong-based China economist at Macquarie Securities Ltd., said in a research note on Monday.

Official Data

The actual figure could be about 8.1 percent, the CICC analysts said. The official ratio as of December was 1.67 percent, the China Banking Regulatory Commission reported on Monday, as the industry’s soured loans climbed to 1.27 trillion yuan, the highest since June 2006.

Meanwhile, investors have priced in a bad-loan ratio of 14.1 percent for Chinese bank stocks traded in Hong Kong, based on current valuations, according to CICC. Those shares have lost an average 12 percent this year.

The amount of bad debt piling up in China as its economy slows 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.

Total credit exposure faced by Chinese banks, including loans and investments in corporate bonds, receivables investments, and credit exposure from wealth-management products, may reach 122 trillion yuan, the CICC analysts said. The banking system has the capacity to absorb as much as 8 trillion yuan of credit losses without eroding equity, they said.

Morgan Stanley helped create CICC in 1995 with China Construction Bank Corp. as part of efforts to develop the country’s capital markets. The Wall Street firm sold its 34.3 percent stake in 2010 for about $1 billion.

— With assistance by Jun Luo

Before it's here, it's on the Bloomberg Terminal. LEARN MORE