Beijing has been on a mission lately to prove the bears wrong. On Wednesday, the nation's banking regulator added to the chorus, releasing data that showed the nonperforming loan ratio of commercial lenders held steady in the second quarter for the first time in almost three years.
There are a couple of caveats China bulls may want to consider before celebrating, though.
A good part of the plateau can be attributed to the base effect. Any nonperforming loan ratio can decrease or remain constant if the overall amount of loans increases, which it has. According to the China Banking Regulatory Commission's statement, total assets for commercial banks increased 15.7 percent.
If you expand loans by that much but the nonperforming portion remains steady, that means there's about 15 percent more soured debt in China, even though the headline ratio looks a bit better. Discounting the base effect, nonperforming loan creation will continue to rise steadily.
Indeed, the actual figure for nonperforming loans rose 3.2 percent in the second quarter to 1.44 trillion yuan ($217 billion). To put it another way, there were more nonperforming loans in China at the end of June than Vietnam's entire 2015 GDP.
Then there's special-mention debt, a category that encompasses all the stuff that looks like it's going to go unpaid, but hasn't yet.
That figure increased 3.9 percent to 3.32 trillion yuan. Add it all up and there were 4.76 trillion yuan of doubtful debts at China's banks, equivalent to the gross domestic product of Malaysia and Thailand combined.
That's on the premise numbers released by the CBRC accurately reflect the bad debt situation in China, which many analysts argue isn't the case.
Regardless, one thing is clear: Bad debts aren't stabilizing, they're merely looking better in an economy that's once again stepped on the credit accelerator. If lending slows, things will start to look ugly again.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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