Cranking Up China's Bad-Debt Needle

The data seem a lot worse than nonperforming loan figures suggest.
At Closing, May 24th
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Chinese bank earnings announced last week didn't paint as bleak a picture as the time before.

Loans at the likes of Bank of China Ltd. and Industrial & Commercial Bank of China Ltd. are souring at a slower pace, and while the absolute number may be relatively high at an average of about 1.8 percent, it looks to be stabilizing:

Is That Really Right?

Nonperforming loans stabilized in the third quarter, but bankruptcy numbers suggest things may not be so pretty

Source: Company filings

Note: Shows data for Bank of China, ICBC, Agricultural Bank of China, China Construction Bank and Bank of Communications.

Yet just a few weeks earlier, the International Monetary Fund released a report saying 15.5 percent of advances may potentially be at risk.

China's actual bad-debt level remains elusive, but some recent bankruptcy data suggest things may not be so rosy.

Chinese courts accepted 1,028 bankruptcy cases involving all kinds of debt in the first quarter, up 53 percent from the same period of 2015, figures released in October by the Supreme People's Court show. That seems a lot steeper than what the nonperforming loan data from the big five state-owned lenders would suggest.

It stands to reason that different institutions will have varying levels of bad debt, which is a reflection of individual lenders' credit policies. But you'd think there would be a closer correlation between what judges are hearing and the story balance sheets are telling. As it is, only Agricultural Bank of China Ltd. reported a rise in bad loans that was comparable to the increase in bankruptcy cases being heard in Chinese courts.

Trouble Mismatch

Only Agricultural Bank of China reported a rise in bad loans that was comparable to the increase in bankruptcy cases being heard in Chinese courts

Source: Company filings; Supreme People's Court

That isn't to say Chinese lenders aren't reporting their numbers correctly. But the bankruptcy data may offer a clearer sense of how ugly things are becoming. And with more than 25 trillion yuan ($3.7 trillion) of wealth-management products out there, banks are only one part of the credit-extension equation in Asia's biggest economy.

If as an investor you choose to trust the IMF and its assessment, there's not a lot to be optimistic about when it comes to China and bad loans, despite what banks' earnings statements might suggest.

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

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    Katrina Nicholas at

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