This came from Nicole Elliott's weekly report.
Ernst and Young estimates that there is $900 billion of non-performing loans in China, more than their $875 billion foreign exchange reserves. This is after clearing out another $560 billion since 1999. It is of course not the only one with this problem. Germany next in line with about $300 billion followed by Japan with $100 billion. The scale of the problem is astounding, and their banking skills are limited: a lethal combination.
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14 comments:
I seem to remember Japan sitting on about $1 billion in bad performing loans. If they are now at $1oo million, that's a tremendous improvement. I've had trouble verifying my number, though.
Excellent point. Non performing loans is the biggest problem in china. I forget the number of auto loans that are late but I do remeber the number made my head spin.
Ther will be a correction eventually and it will effect all of asia IMO. I would love to side step the correction (wouldn't we all), but I am still bullish long term on asia.
KL
There is a ironic gulf emerging - those who represent that the NPL position needs to be considered in the context of the lenders being state policy entities and so not bound by commercial practices and demands, balanced by the considerable capital commitments being made by foreign investors to targeted Chinese lending institutions.
What is supposed to happen in 2007? I remember seeing that China must open up its banking sector to foreign-owned entities (instead of the current practice of foreign entities having to invest in existing Chinese banks). So does this mean there will be a Citibank on the corner now? If so, does this mean a potential run on the Chinese banks?
From what I've seen and read about nonperfoming loans in the past, the government hasn't put much capitalism in place except for Enron-like accounting. GAAP is used--guess assets and profits.
I am aware of several people that expect a financial crisis of some magnitude stemming from this issue.
At this point I don't have a definitive opinion.
I read somewhere China has 20-30k state enterprises, where most problems occur. Private companies are generally better run. Those listed on Hongkong are biggest and may not have too many non-performing loans. The average book value of the non-public listed companies should be less than $100 million. When you do some quick calculation, it just seems that $900 billion is very high. I wonder how E&Y gets the number. Now, regarding KL's point, there are not too many consumer loan's in China, except in real estate area. With 60% saving rate, I can't belive there is a high default rate in consumer loans.
Anyway, my point is with very little transparency in China, there seems to be more sound bites than hard facts in the media.
The Economist reported VERY large late paymnets on auto loans in there special China issue several months ago. Other NPL issues were also sighted
KL
All this talk about NPL's, State Control, and the true lack of transparency is making my stomach churn. I'll keep my stoplosses in place and my exposure less than 5% Nice debate in WSJ Roger, Tom in Indy
Tom, thanks for the WSJ nod.
The truth is no one really knows what the number is, but it is big. The trouble in China is that there is no system to collect the real numbers, and subordinates always manufacture the number the bosses want to hear. I know, I sit on the board and the risk management committee of a mid- sized bank in China.
Non-performing loans is the symptom, and not the root of the problem of the Chinese economy. Before, it reflects the losses of the state-owned sector; now it also reflects the rampant corruption and theft of the society as whole.
On Chinese reports, the only number you can believe in the date, but I check the calndar just to be sure.
http://www.gulfbase.com/site/interface/officialindexdetails.aspx?m=1
Look at this financial performance and China looks good.
Ernst & Young recently retracted its report and admitted it was wrong. Ernst & Young actually said the Chinese banks' figures were accurate, not the ones E&Y previously disseminated. I kid you not.
E&Y has so much business in China,they can't afford to offend the Chinese government two weeks before the IPO of Bank of China. See how quickly UBS, one of the global book runners of the BOC issue quickly retracted, although it contributed the 250B number for new NPL's quoted by E&Y.
--plus.....
So much for the accuracy and/or integity of the accounting profession.
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