After trying to work out how big China’s bad debt problem might be, many people still turn round and point to the country’s mammoth foreign exchange reserves as its great get-out clause, writes Paul J. Davies.
The idea is seductive. On a deliberately gross calculation using the 20 per cent non-performing loan rate found at China’s big banks in the late 1990s, total bad debts would amount to Rmb21tn.
A more sensible stab might put the level at roughly half that, or Rmb10tn. These are painfully large numbers – but hang on, China’s central bank has foreign exchange assets of $3.4tn, or Rmb20tn. Perfect – what’s the problem?
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