The Economist warns of hidden bad debts in Chinese banks, compounding the financial sector’s existing challenges.
Local governments are reportedly struggling to repay approximately 65 trillion yuan (RM42.8 trillion) in off-balance-sheet debts, posing a significant concern.
The magazine highlights defaults by major property developers on offshore bonds and substantial debts owed for unbuilt homes, further complicating the financial landscape.
Additionally, China’s leading wealth-management firms have initiated defaults on investor payments.
The situation stems from issues with loans to smaller enterprises that arose during the Covid-19 pandemic. While a precise figure for the unpaid loans is unavailable, public disclosure by banks is not expected until next year.
The ongoing moratorium on loan repayments has been intertwined with state efforts to boost the economy by encouraging banks to extend loans to smaller firms at the lowest possible interest rates.
The policy, which previously faced resistance, has seen success this time, as a banking industry crackdown has made leaders more amenable to official directives.
Consequently, around 28% of all loans in China were allocated to small and micro-enterprises at the start of the year, up from 24% in late 2019.
However, The Economist cautions that this may have led to a serious mispricing of assets, as loans to these enterprises are being offered at exceptionally low interest rates.
This average has dropped from about 6% in 2019 to around 4% annually.
Additionally, a surge in higher-rate, long-term deposits has further squeezed bank margins.