HONG KONG – China’s financial system could face $220 billion in losses due to bad loans, according to a report released Tuesday by Fitch Ratings.
Fitch said the losses could swamp the reserves of major banks, and in some cases completely wipe out their capital.
“This figure is close to one-third larger than the stock of capital in the entire banking system, underscoring the extent of asset quality weakness that still remains,” said Charlene Chu, the report’s author.
The report also puts the country’s total amount of troubled debt at roughly $700 billion – more than quadruple the $164 billion figure frequently cited by authorities.
While the government’s number refers to officially classified bad loans at commercial banks, Fitch’s number covers a broader range of debt, including “special mention” loans that are not yet nonperforming but may become so.
On top of the official $164 billion, Fitch cites $40 billion in bad loans at rural cooperatives as well as $270 billion of “problem loans” in the banking system that are not officially classified as “nonperforming.”
Fitch’s total also includes $197 billion in nonperforming loans that have been transferred to the balance sheets of asset-management companies, which the ratings agency said “no longer represent direct losses for banks but are a future liability for the government.”
Based on bad-loan recovery ratios it calls “relatively conservative,” the report concludes that total losses from bad loans could be upwards of $260 billion.
Since Chinese banks’ loan loss reserves are estimated at $40 billion, that leaves $220 billion in “total estimated unfunded losses.”
The report adds that “curtailing the creation of new NPLs remains an ongoing challenge … given banks’ still underdeveloped risk management practices and internal controls.”
The Chinese government has been sensitive to high estimates of the country’s bad-loan problem. On May 15, New York-based accounting firm Ernst & Young retracted a report that put China’s potential bad-loan liabilities at $911 million.
The retraction came days after China’s central bank issued a statement calling the Ernst & Young figures “distorted” and “ridiculous.”
Ernst & Young denied its retraction was due to official pressure.