Chanos Says More Stresses Apparent at 'Loaned Up' Chinese Banks

  • Loan-to-deposit ratios are in mid-80 percent range: Chanos
  • Hedge fund manager comments on sidelines of SALT conference

Jim Chanos.

Photographer: David Paul Morris/Bloomberg

Stresses in China’s banking system are becoming more apparent amid the mounting pile of credit extended by the nation’s lenders, according to Jim Chanos, the hedge fund manager who predicted the 2001 collapse of Enron Corp.

Loans in China’s banking system had risen to the mid-80 percent range of deposits, compared with the government’s previously mandated ceiling of 75 percent, Chanos told reporters on the sidelines of the SkyBridge Alternatives Conference in Las Vegas on Thursday. That has put stress on banks’ funding, leading them to resort to wealth-management products, said the short seller, who has warned about Chinese debt before.

“We paid attention to it this year because all of a sudden about a month or two ago, all of the state media organizations began reporting about financial risk,” Chanos said. “So when all of them start saying something, you know there’s a reason for that, that the leadership at the top is either trying to send a message or is concerned.”

Since April, China’s government has been on a push to strengthen the country’s financial system, including ordering banks to bolster risk controls, stepping up scrutiny of shadow financing and cracking down on malfeasance among bureaucrats. While the moves have rocked China’s financial markets, the government is signaling its determination to curb the estimated $28 trillion debt pile that poses a risk to economic stability.

For two decades, China imposed a cap that limited loans to a maximum 75 percent of deposits as part of measures to contain risks. That ceiling was abolished in October 2015, in part because it was seen as a blunt tool that encouraged illicit deposit-hoarding and moving loans off balance sheets.

Stress Indicator

The loan-to-deposit ratio for Chinese lenders, an indicator of the banking system’s ability to weather stress, stood at 67.7 percent at the end of March, data from the banking regulator show.

The adjusted loan-to-deposit ratio, which includes a range of off-balance sheet items, climbed to 80 percent by the end of June last year, according to S&P Global Ratings. For some smaller Chinese lenders, the ratio has already topped 100 percent, S&P estimated.

“The banking system is loaned up,” Chanos said. “Because of the nature of the problem, and debts are still growing twice to three times as fast as the economy, a lot of loans are just simply new loans to keep the old loans current, so-called Ponzi finance.”

— With assistance by Jun Luo, Katia Porzecanski, and Bei Hu

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