The Chinese Banking Regulatory Commission (CBRC) has announced that it will do regional and national stress tests this year to determine the extent of bad credit and non-performing loans on banks’ balance sheets, but it’s not clear how these tests will differ from the ones that were already going to take place.
Chinese banks already submit stress test results
“Commercial banks all have to submit stress test results to the local CBRC branch every quarter. The Big Five banks reporting a rise in their NPL ratios probably caused CBRC to put more stress on this issue,” said a banking executive in Shanghai, Gabriel Wildau reports for Reuters. “Until now I haven’t received a notice from CBRC asking for anything special.”
If you think the extra emphasis on the stress tests is meant to calm investors’ nerves, or wonder how we’ll know that the results haven’t been massaged, there’s no need to worry. Experts don’t expect the stress test results to be made publicly available anyways. The announcement itself may have been a PR move, but the tests appear to be an internal policy tool for a government that is trying to balance the need to rein in spending with the danger of a run on the banks.
Financial advisors concerned about Chinese bond market
The drumbeat of financial advisors warning investors to be cautious when putting money in China (its bond market especially) has been growing for more than a year, with some even arguing that the country needs a Lehman-style failure to force it to deal with the legacy of its investment and debt fueled expansion.
China’s total public debt was over 53% of the country’s GDP at the end of last year, $3 trillion of which was owed by local government. Private debt is also at incredibly high levels, and there isn’t much agreement on the actual level of bad debt going around. The official statistic for NPL is around 1%, which is already high, but that could be an optimistic figure. The CBRC has warned banks not to improve its numbers by issuing loans to distressed debt (who would use them to pay off the old loan, staying current without reducing total debt) which implies that this is currently happening.
Even if it has no interest in sharing the results with investors, hopefully China will put pressure on its banks to come clean about how they would deal with a downturn, so the government can gauge how what policies it can enact without a steep drop in growth.