China banks could see bad loans rise in 2013 due in part to delinquency risks from industries plagued by overcapacity

Updated: Wednesday July 31, 2013 MYT 5:01:18 PM

China banks could see bad loans rise in 2013-industry body

BEIJING (Reuters): Bad loans at Chinese banks could rise by between 70 billion yuan and 100 billion yuan ($11 billion and $16 billion) in 2013 due in part to delinquency risks from industries plagued by overcapacity, the China Banking Association said in an annual report on the industry. The report comes several days after Beijing began a new campaign to reduce overcapacity in several industries, a step seen as key to eventually rebalancing China’s economic structure. It warned that steel, photovoltaic and shipping sectors may be at the forefront of a new crop of bad loans. “Such industries facing excessive capacity could lift non-performing loans and require highest attention from banks in their short-term risk control,” the industry body said in the report, published on its website late on Tuesday.Remedying overcapacity could bring some pain to banks, who have historically focused their lending on such sectors.

Total bad loans stood at 526.5 billion yuan at the end of Q1, slightly up from the 492.9 billion yuan at the end of 2012, according to separate figures from the banking regulator.

Earlier this month China’s central bank removed controls on bank lending rates, giving banks the freedom to compete for borrowers. Many economists say this will help banks to learn to better price risk and force them to allocate capital more efficiently.

Bank lending is a focal point in China’s monetary policy as it is controlled by the ruling Communist Party as a way to manage economic growth and inflation. The government tells banks how much to lend, to who and when.

The association’s report said the ratio of non-performing loans to total lending will largely remain at the similar level with 2012, due to a rise in overall lending.

The average bad loan ratio in China’s banking system was 0.96 percent at the end of the first quarter of 2013, up slightly from 0.95 percent at the end of 2012.

The report also said that what happens to lending to the property sector and local government financing vehicles will be key to determining the banking sector’s long-term asset quality, though it did not elaborate.

Concerns have been raised about the potential for systemic risk from piles of debts collected by local governments and from a possible property bubble, prompting the central government to order a nationwide audit of local debt.

The report also said that shrinking net interest margins and a slowing development of fee-based businesses will dampen profit growth for banks in 2013, but also flagged optimistic signs, noting that China’s urbanisation drive and efforts to expand domestic consumption will mean business opportunities.