Chinese banks outsmart regulators

The non performing assets of Indian PSU banks have been a staple feature of financial publications over the past few months. The bad loans have nearly doubled in absolute value over the past 12 months. Even as a percentage of total loans, the ratio is heading closer to the levels seen in 1992-93. Hence there is every reason for the banks, the regulator and investors to be worried. Thankfully, the RBI has done a good job of at least ensuring that reporting of such financial distress is regular and transparent. Even the banks that tried to hide restructured assets under the carpet could not get away. The RBI ensured that they pay the penalty by providing more for the slippage on such loans.

The Chinese banking regulator, however, does not seem to be having much success. As per Wall Street Journal, the Chinese banking regulator has been squeezing liquidity for months. This is to ensure that the banks do not indulge in unwarranted high risk lending. But it seems the banks have outsmarted the regulator. By window dressing the loans to risky corporate as less risky loans to banks, the entities managed to skirt lending limits. As much as 2 trillion yuan (US$ 326 bn) have been lent under such transactions. Even the claim that the quality of loan in Chinese banking sector is sanguine has no takers. In fact, as per rating agencies, the Chinese banking sector is sitting on a ticking time bomb of NPAs. Given the size of Chinese banking sector, once can only hope that the banking crisis does not evolve into a global one.