Finance

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.

Perhaps China's problem is its lenders rather than its borrowers.

Deep in the nonperforming loan details of Industrial & Commercial Bank of China and Bank of China, the nation's two most international lenders, was a large spike in overseas soured debt. That could slow Chinese companies' acquisition spree, which has largely been fueled by cheap advances from domestic financial institutions.

What has caused the sudden change is unclear, but both ICBC and Bank of China have been very aggressive in lending to Beijing- and Shanghai-based firms that have been buying up businesses from Seoul to New York. With bankruptcies escalating, some of the foreign debt seems to be going bad as well.

Offshore Angst
Overseas nonperforming loans at China's two most international lenders have spiked in the past six months
Source: Company filings

So far, the trend hasn't stopped the duo from continuing to lend beyond China's borders. Both banks' overseas loan books are growing at the fastest pace since 2013:

Upward Acceleration
Overseas loans are growing at the fastest pace since 2013 at Bank of China and ICBC
Source: Company filings

But with foreign deposits increasing at a slower pace, the two are nearing a point where they have to ask themselves whether it makes sense to continue lending indiscriminately in dollars.

Tapering
While offshore loans have accelerated, deposits abroad are growing more slowly
Source: Company filings

ICBC doesn't always break out its international deposits, but at the end of 2015, its offshore loan-to-deposit ratio was 148 percent, just below the 150 percent threshold required by Chinese regulators. That figure could have deteriorated further. And with the yuan depreciating, Libor rising and offshore loans souring faster, the cost of lending abroad is becoming increasingly harder to justify back at headquarters.

Both banks openly admit they are an important part of President Xi Jinping's "going out" strategy, which fosters the creation of multinational champions via acquisitions. But with mounting problems at home, China's big two global lenders may want to consider pulling in their horns.

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 clangner@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net