China’s Trillion-Dollar Missed Virus Opportunity
The Covid-19 shock offers a chance to clean up decades of bad debt. Beijing needs to seize it.
Shakeup, or business as usual?
Photographer: Emmanuel Wong/Getty Images
If there’s one way the coronavirus may help Beijing, it’s with an excuse to wipe away years of bad debts embedded across the financial system as yet another deluge of soured loans looms. This may be the time for a dose of fresh equity in China’s 288 trillion yuan ($41 trillion) banking sector.
In the weeks since Covid-19 halted the economy, China has taken several steps to avoid outright bankruptcies and defaults. The stress on corporate balance sheets is real. Non-performing loans as a portion of the total on lenders’ books, estimated at over 10% before the epidemic, are expected to rise. China’s banks and bad-debt managers held $1.5 trillion of non-performing and stressed assets at the end of 2019, according to a recent PricewaterhouseCoopers LLP study.
If banks start recognizing too much of China Inc.’s bad debt, their credit costs will rise sharply and eat into profitability and capital. On the other hand, the additional hit because of forborne loans could run to as much as 1.6 trillion yuan ($224 billion), according to S&P Global Ratings. That will crimp their ability to lend.