Chinese Banks To Rake in Record Profits For A Fifth Year, But…
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China’s biggest banks are set to report record level of profits for the fifth consecutive year. However, analysts are warning that rising bad debt and non-performing loans may soon trigger a series of worrisome defaults.
The world’s most profitable bank, the Industrial and Commercial Bank of China, and the four other Chinese banking titans, are expected to report their fourth-quarter net income by the end of this month, and analysts are expecting a profit increase of 15 percent.
China’s biggest banks are set to report record level of profits for the fifth consecutive year. However, analysts are warning that rising bad debt and non-performing loans may soon trigger a series of worrisome defaults.
The world’s most profitable bank, the Industrial and Commercial Bank of China, and the four other Chinese banking titans, are expected to report their fourth-quarter net income by the end of this month, and analysts are expecting a profit increase of 15 percent.
According to data from the China Banking Regulatory Commission and the Federal Deposit Insurance Corp, China’s 3,800 banks had a fourth-quarter net income of $35.4 billion, a third more than the earnings of over 7,000 American lenders.
The five largest Chinese banks alone are expected to post joint-profits of 139.5 billion yuan, or $22 billion.
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However, in a foreboding sign, a Chinese banking regulator warned that non-performing loans are expected to rise for the first time since Q3 2008. Last week, Standard and Poor’s had warned of a spike in bad debt that could dampen the profitability of Chinese banks.
While the rise in non-performing loan ratio is projected to be around 1 percent, May Yan, a Hong Kong based analyst with Barclays cautioned:
[quote] It is time to take profits off the table. The rebound of NPLs is not temporary. It is the beginning of a worrisome trend. [/quote]
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Renewed Fears Over Chinese Slowdown
Experts have long warned of a Chinese slowdown, and the first signs are starting to manifest in weak economic and financial numbers. However, the bigger problem is the rate at which China is accumulating debt.
Writing on the topic of Chinese debt, Michael Pettis, senior associate at the Carnegie Endowment for International Peace and finance professor at Peking University, argues:
[quote] As for the claim that successful fiscal reform can keep the impact limited, I am not sure what this means. Fiscal reform in China can only be successful, in this context, if it eliminates loss-making investment activities, and unfortunately I see it doing nothing of the sort. If the problem is that China is keeping growth high only or mainly by borrowing and misallocating the proceeds, then hidden losses are rising and one way or another the bad debt must be resolved. The only two ways to resolve the bad debt are by defaulting or by forcing someone else to make up the loss, and the former almost certainly won’t happen to any great extent. [/quote]In 2008, Beijing unveiled a 4 trillion yuan ($632 billion) stimulus package to boost the local economy following a sharp contraction in global equity and credit markets, resulting in credit glut for local governments and property and infrastructure developers.
However, by 2010, local governments were defaulting on their loans, with China’s five biggest banks reporting bad loans of almost 300 billion yuan ($47.4 billion) in December 2011.
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