Chinese non-performing loans – are there investment opportunities?
December 22, 2015
Investment opportunities in Europe remain at an all-time high – but a number of investors are also paying increasing attention to the Far East. With that in mind I thought I would make a few comments on the developing situation in China.
Chinese NPLs on the rise
Non performing loans (NPL) in China are clearly on the rise with data from the China Banking Regulatory Commission (CBRC) suggesting that the level of NPLs has increased over 16 consecutive quarters reaching RMB 1,200 billion (c.€170 billion) by the end of September 2015. In a nutshell, rising NPLs are a result of a 5 year debt binge and a slowing economy.
Under CBRC rules the NPL ratio for China’s banks sits at 1.59%, which sees China’s NPL ratio as relatively low compared to the World Bank average of 4.2%. However, this is likely to be driven by the differences in NPL definitions and provisioning rules in China – for example, where a borrower is more than 3 months past due this is only “usually” considered to be an NPL when a bank expects a loss might be incurred. Instead, these loans are usually classified as “Special Mention” and this ratio has grown from 3.12% in 2014 to 3.77% in 2015. This, coupled with the officially reported NPL ratio, gives a more likely range of c.3%-5% as a total NPL ratio.
How high will they go?
I see it as inevitable that NPL levels in China will continue to rise, although how high they will go is anyone’s guess as Beijing has the ability to control the speed of loan defaults as a significant portion of the lending in the system is by state owned banks and companies. I therefore see the risk of a financial crisis emerging in the banking sector as being extremely low.
In terms of possible market opportunities, on the whole I expect the outlook for foreign investors to be relatively uncertain in the short term, given domestic investors have a natural advantage. Our local team is however seeing increasing deal flow and I expect the volume of investment opportunities to increase. If foreign investors are prepared to “take the plunge” then it will provide them a good learning ground in preparation for follow on opportunities in the medium term.
What do you make of the Chinese NPL market? What are the opportunities for investors? Share your thoughts below or schedule a meeting to discuss your plans in confidence.