China Bad-Loan Level Seen Understated After Economy Slows

China’s bad-loan ratio may have been understated by at least a third in the second quarter as an economic slowdown weakened borrowers’ ability to repay debts.

The level may have been 1.5 percent or above, China Orient Asset Management Corp. said in a report yesterday, citing its survey of 64 local bank executives. That compared with an official number of 1.08 percent.

Banks’ bad loans jumped by the most since 2005 in the third quarter as the nation heads for the weakest economic expansion since 1990. Soured credit accounted for 1.16 percent of outstanding loans in the third quarter, data from the China Banking Regulatory Commission shows.

About 80 percent of those surveyed said bad-loan numbers may have been “significantly” or “slightly” understated, according to Orient Asset Management. Those who said the actual ratio may be above 2 percent accounted for more than one-third of those surveyed while another one-third of the executives said it may be 1.5 percent-2 percent.

The survey was conducted in October and its participants included risk-management executives from large state-owned banks as well as smaller city and rural lenders, Orient Asset Management said. Orient Asset Management is one of four bad-loan managers that China set up in 1999 to manage bad assets from the nation’s largest lenders.