China Bank Bears Must Brace for Disappointment

Global investors concerned about a looming spike in Chinese nonperforming loans should take a look at recent data from the China Banking Regulatory Commission. If they did, then maybe they wouldn’t have as much angst. The CBRC said last week that the NPL ratio at the end of the second quarter was flat at 1.74 percent, while net interest margins improved to 2.05 percent, up from 2.03 percent in the first quarter. Those numbers suggest China’s banks will report stable first-half earnings.

While some will question whether the positive trend is sustainable, the reality is that it’s hard to fight the efforts of the government, which is accelerating changes to bolster the banking system. Over the past year, China has announced several policies to reduce NPL risks at the major banks, such as requiring credit committees, enabling local asset management companies, promoting debt-for-equity swaps, encouraging the growth in securitization, and promoting new state-owned enterprise capital management holding companies. Regional asset management companies are likely to play an increasingly important role in managing bad assets, possibly by stepping up purchases of NPLs.