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China’s banking industry: BIS scaremongering unwarranted but warning signs must be heeded
China’s economic growth has been slowing for a while now and while it remains healthy, there are concerns over the state of the country’s banking industry. Non-performing loan (NPL) rates have been increasing, with some of the country’s biggest banks seeing a surge in that particular metric.
Bank of China and ICBC saw noticeable increases in their NPL rates during 2015, necessitating greater allowances for credit losses, while Agricultural Bank saw something of a surge from 1.54% to 2.39%, with the retail and wholesale industry the main cause for concern.
The Bank of International Settlements (BIS) has waded into the debate on the health of China’s banking industry and has used credit-to-GDP gap data to predict a full blown banking crisis in three years’ time. However, the metric is not 100% foolproof and the issue in China is around credit quality more than the amount being lent. Economic growth is, by global standards, still very healthy and there is therefore capacity for more debt, as long as proper credit screening checks are performed and money is lent responsibly.
If the worst were to come to pass, the Chinese state would undoubtedly intervene. The country’s banking industry remains heavily influenced by the Chinese government: the country’s four largest banks (the Bank of China, China Construction Bank, the Industrial and Commercial Bank of China, and the Agricultural Bank of China) are all partly state-owned. The government would therefore step in to protect its own interests if nothing else.
While warning signs are certainly there and must be heeded, shouts of an impending crisis are overblown.