International Monetary Fund Estimates Corporate Loans are at Risk among Chinese Banks
The International Monetary Fund has estimated at least $1.3 trillion corporate loans that are potentially at risk among Chinese commercial banks balance sheets at the end of 2015 based on a new report that was released. 60 percent of these loans eventually go south and commercial banks incur a potential loss of up to $756 billion accounting for 7 percent of the Gross Domestic Product in China.
The prediction was based on the sample of 2,871 companies that included 2,607 listed firms and 264 unlisted firms as they borrowed $2,775 billion in total wherein 14.1 percent or $392 billion is considered debts at risk. Even with such a large number, the loss is manageable given Chinese banks and policy buffers are continuing to give strong growth into the economy. The loss is equivalent to 1.9 years of profit based on the 2015 pre-tax profits indicated on the report.
Although the report might have overestimate unlisted companies risks as the method in categorizing in the non performing loans tht is used in the reports is different from the prevailing international practice. The rate of loss for loans is potentially at risk and might have been set too high and the figures might involve regular loans. The purpose of doing this is to take full account of possible losses and the estimate plays a certain role in a pressure test. Chinese commercial banks have $400 billion pre-tax profits and $356 billion of provision for non performing loans for 2015 that is adequate in covering the lose in a relative short span of time without compromising the capital base.