The executive summary: Stocks rise for Chinese lenders as the government relaxes the rules on bad loans to encourage more spending and lending in China and abroad.
This immediate profit boosting decision could be considered a quick win for Beijing, however as the financial crisis taught us, relaxed rules don’t always lead to happy endings.
The regulating authority for China’s banking system has decided to go softer on the rules and legislation that makes lenders set aside certain provisions in case bad loans cannot be repaid, to avoid a government bail out. There have been a lot of regulatory introductions in China over the recent years, with some naming it a “regulatory Windstorm”, however this latest news shows that they aren’t afraid to make changes to help lenders keep money flowing through the Chinese economy.
There have been years and years of suspicion over banking balance sheets in China, with many rumours suggesting that rather than declare all of their bad debt, they simply rely on off balance sheet accounting to disguise loans and losses that they do not want in the public domain.
They have also previously had the highest and most stringent rules for bad debt, with lenders forced to set aside 150% of NLPs and 2.5% of loans.
However under new rules set by the the CBRC (China Banking Regulatory Commission) the regulators will now be easing rates to allow for more lending, with rates going as low as 120% and 1.5% respectively. This is according to multiple media outlets on the local level, including the popular outlet Economic Information Daily.
The banks new found money will allow them to register a greater profit or lend even more money to local consumers.
Examples of bad debt could include:
This new rule set has brought China much more in line with the rest of the world, with the majority of countries forcing banks to set aside ratios of 50 and 100% of NPLs.
However when a large bank scales it can be very difficult to maintain these levels, as happened with the Industrial and Commercial Bank of China, that has reportedly breached the 150% limit on multiple occasions, alongside repeatedly lobbying for the rates to be made lower.
There are some new criteria for local lenders, which include measuring their activity level of disposing of bad loans. The market for distressed debt has actually been increasing lately, which has led to an increased sales of bad debt across the continent.
Banks will also be measured on their capital adequacy ratio, along with how accurately it has been predicting loan classifications based upon how many people default on a loan.