Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

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.

Steady, at Least for Now
China’s official bad-loan ratio held at 1.75 percent in the second quarter after almost three years of increases
Source: China Banking Regulatory Commission

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. 

Freshly Minted
Newly formed bad loans at China's big state banks quadrupled in two years, adjusted for write-offs and disposals, to 461 billion yuan . Their average nonperforming loan formation rate surged to 1.24 percent
Source: Bloomberg Intelligence, company filings
Note: Nonperforming loan formation at ICBC, China Construction Bank, AgBank and Bank of China. Formula: (ending NPLs - beginning NPLs + write-offs/transfer outs - recoveries)/beginning gross loans.

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.

Double Down
Special-mention loans, or debt that's on its way to souring, has doubled since January 2014 and is still rising
Source: China Banking Regulatory Commission

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.

Wealth of Bad Debt
China had more debt at risk of going unpaid or souring at the end of June than the GDP of Thailand and Malaysia combined
Source: Bloomberg

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.

To contact the author of this story:
Christopher Langner in Singapore at

To contact the editor responsible for this story:
Katrina Nicholas at