China defends banks’ strategy on managing debt pile by Tom Mitchell and Yuan Yang in Beijing

News    2016-12-01 13:59:33

Chinese officials hit back at critics of the country’s mounting debt pile on Thursday, saying the country’s banks had taken measures to ensure non-performing loans would not pose a systemic risk to China’s financial system.

Chinese officials hit back at critics of the country’s mounting debt pile on Thursday, saying the country’s banks had taken measures to ensure non-performing loans would not pose a systemic risk to China ’s financial system.

“China’s banking sector is generally stable and risks are under control,” Wang Shengbang, a senior official with the country’s banking regulator, said at a briefing.

According to Mr Wang, Chinese banks wrote off non-performing loans (NPLs) worth more than Rmb2tn ($304bn) over the past three years after the China Banking Regulatory Commission ordered the sector to boost provisions.

In the depths of the global financial crisis, the Chinese government launched a Rmb4tn investment programme that was lauded at the time for providing a critical boost to world economic growth.

But as growth rates in the world’s second largest economy fall to their lowest levels in a quarter of a century, everyone from George Soros to analysts at the International Monetary Fund are warning that the investment surge could lead to a cascade of debt defaults. At the same time, an increasing number of western governments are blaming chronic overcapacity in China’s steel and other heavy industries for plant closures and job losses around the world.

The Bank of International Settlements estimates China’s total indebtedness at more than 250 per cent of gross domestic product. Most concerns focus on corporate debt, which the IMF estimates at 145 per cent of GDP.

While senior Chinese officials have also acknowledged that debt levels must be reined in and identify industrial overcapacities as a critical challenge, they have bristled at international criticism of their economic policies and predictions of a looming financial crisis in the country.

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The briefing on Thursday, organised by the State Council, also included representatives of China’s central bank, finance ministry and economic planning agency.

“For the first time, China is talking about its debt issue systematically and publicly,” said Zhou Hao, an economist with Commerzbank in Singapore. Other analysts have noted a move towards more co-ordinated policy-making between Chinese ministries as they attempt to deal with the debt problem.

According to Mr Zhou, without the Rmb2tn in write-offs over the past three years, the banking sector’s overall NPL ratio would stand at four per cent rather than its current 1.75 per cent.

In contrast to high levels of corporate indebtedness, Chinese officials argue that the central and local governments have room to increase borrowing, as do consumers. They also point out that the distress in the country’s heavy industrial sectors is counterbalanced by strong profit growth in technology, ecommerce and other areas of the “new economy”.

As a result, they remain confident that the country’s economy can grow at an average annual rate of 6.5 per cent through 2020