BEIJING/SHANGHAI (Reuters) – China’s top banking regulator warned of rising credit risk from real estate, local government debt and unconventional forms of finance, sources with direct knowledge told Reuters, highlighting Beijing’s struggles to prevent risky debt from engulfing a stuttering economy.
The sources cited a speech given by Shang Fulin, chairman of the China Banking Regulatory Commission (CBRC), during a teleconference in early May.
The amount of non-performing loans in the first quarter has already reached 56 percent of the total amount last year, Shang said, according to the sources. Unconventional forms of credit – which usually refers to instruments like entrusted loans and letters of credit – were also on the rise, he said.
The CBRC did not respond to requests from Reuters for comment.
As China’s economic growth has slowed, Beijing has struggled to balance two policy goals.
It wants to shore up finances at local governments, many of which got heavily into debt using opaque financing vehicles, via a centrally managed debt swap.
On the other hand, Beijing is also keen for commercial banks to lend more to the “real economy,” meaning loans to companies investing in growth and not to those who speculate on asset markets, or to simply help firms stay afloat.
However, the concern is that banks will be less willing to lend elsewhere if they have to divert too much capital to local governments.
Shang said credit risk had risen among commercial banks in China in the first quarter, with the total number of bad loans at 982.5 billion yuan ($158.44 billion), up 139.9 billion yuan from the same period last year, bringing the bad loan ratio to 1.39 percent.
He said over 30 percent of loans to local governments used land or proceeds from land sales as collateral, which will cause increased repayment pressure as proceeds from land sales decline, in particular in western inland regions. Sliding land prices will also cause the value of the loan collateral to decrease, Shang added.
He urged financial institutions to cooperate with local governments regarding debt issues, and also called for effective measures to prevent a liquidity crunch in real estate sector, including allowing borrowers to roll over their debt.
(Reporting by Li Zheng, Li He and Pete Sweeney; Editing by Shri Navaratnam)