Are China’s Banks About to Be Bailed Out? – Impact on Trade Finance

We know to mistrust any data coming from China, but certainly bank data on non performing loans even more so. Optimistic accounting can rule the day and the difference between saying you have 3% nonperforming loans on your books to 10% or even 15% is drastic.

According to China Banking Regulatory Commission data and PriceWaterhouse analysis, Chinese non performing loans (NPL) are still below 2% but growing fast.

China Bank NPL1

Even the Chinese regulators will publicly admit the trend is negative. Shan Fulin, chairman of CBRC commented "At the end of 2015, commercial bank non-performing loans increased for 17 consecutive quarters, and the non-performing loans increased for 10 consecutive quarters.”

Note it is easy to under-report NPL by using various techniques like refinancing state owned enterprises or just plain old fashioned underreserving. An independent analysis of public Chinese companies indicated that for 14% of the companies, interest payments exceeded revenues.  Not a good sign and clearly not in line with the chart above.  So there is little doubt at some point Chinese banks will need restructuring and recapitalization by the Chinese Government.  The Credit Swap Data indicates the market believes this as well, as China regulators will not let a bank fail.

Credit Default Swaps

Ultimately what will bail out China are two things:

  1. They have a high savings rate amongst their population
  2. But most importantly, they actually make stuff. Lots of stuff. And even though we have heard about trends such as onshoring, energy prices making US manufacturing competitive, Chinese logistics costs too expensive, the infrastructure and regulations (or lack thereof, things like labor laws, OSHA, etc.) enable Chinese manufacturing to plug on.

How will this ultimately impact trade and trade finance? That’s a very good question, but as Chinese banks have to shrink due to their losses, I would imagine trade loans are one of the first places to start given their short term nature.

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