At last: banks doing what they are supposed to. In China they are lending more and, under orders from the regulator, also increasing provisions against bad loans.
Sensible stuff. Building up a buffer against bad loans while lending and profits are growing – remarkably, they still are in China – is a good move. Non-performing loans are at about 2.5 per cent compared with more than 15 per cent earlier in the decade when the sector was restructured. At the end of last year, regulators ratcheted up the provisioning level to 130 per cent of bad loans; now, reports suggest, that has been lifted to 150 per cent. Do the sums, and that implies 3.75 per cent of all loans are at least fully covered. Some bulls go even further. Because about half of all lending is fully collateralised, losses should only be expected on the other half. That doubles the effective level of provisioning again. Given that a slew of lending is to government-sponsored projects, Chinese loan books are well protected.
Until, as western banks know, they are not. One problem is the likely inflated value of much of that collateral. Another is the definition of NPLs itself, which excludes “special mention” loans. At the end of 2007 these were about 6 per cent of all loans at the big three listed banks, roughly double the NPL rate. Include these and the extra cushion looks more threadbare. Another relates to supposedly implicit government guarantees. Old China hands know these cannot be relied upon, especially from provincial governments. A decade ago, the failure of Gitic, the investment arm of Guangdong's provincial government, left (mostly foreign) investors holding $4bn plus of duff debts. Greater provisioning reduces future risks for China's banks. Whether it is enough to keep them lending into an economy already under pressure remains to be seen.