BEIJING — More dour news for the Chinese economy as data released on Friday estimate the country’s shadow banking industry could be as high as almost 60 percent of gross domestic product while nonperforming loans were at 15 to 19 percent of outstanding credit in 2015, compared to the official 1.6 percent, according to an assessment from brokerage CLSA Ltd.
Bad credit in shadow banking, or off-balance sheet lending by banks, could amount to 4.6 trillion yuan, or $707.8 billion at current exchange, with potential losses equal to 4 percent of GDP, CLSA said, adding that listed bank shares “have not adequately discounted NPL risk.”
The brokerage said it estimates that fund-raising equal to 10 to 15 percent of GDP is needed to offset the bad loan epidemic. “Most of the bad debts are incurred by loss-making companies,” CLSA said.
“It looks pretty bad to me,” Francis Cheung, CLSA’s head of China and Hong Kong strategy, said during a conference call, adding he projects debt ratios could go as high as 15 percent. “[Banks] need to start recognizing the problems and start to deal with it. We are still waiting to see what they decide.”
China’s economy for the first quarter of 2016 expanded 6.7 percent year-on-year, slightly lower than its 6.8 percent growth in the fourth quarter of last year. For 2015, Beijing reported 6.9 percent growth, the lowest in more than two decades.
Leaders have been touting the so-called “new normal” growth whereby they’ve been working to shy away from infusing the economy with stimulus, which has led to a glut of unused infrastructure projects and widespread bad debt, particularly among local governments.
While China’s property market has rebounded with investment back at positive growth, this has only deferred the problem. “Most of the bad debt is in the property sector,” Cheung said. “You can imagine if you have a correction to the property sector, what kind of stress that does to the economy.”
Property inventory remains “high” at 4.9 years from a record high of 6.4 years, CLSA said.
CLSA said it projects rising unemployment will cause further pressure as manufacturing struggles with employees bargaining for higher wages, a weak global economy and some, mainly industrial, sectors with overcapacity that need to be streamlined to eradicate excess.
The firm said it sees any easing on credit as well as government stimulus going toward infrastructure projects — something the country does not necessarily need other than to create jobs and support manufacturing. “Infrastructure will not really slow,” Cheung said. “It is the one lever they really have to push the economy.
“We show that capacity utilization is at GFC [global financial crisis] lows, which means bad debt will get worse,” CLSA said in its report, “Bad Debt Epidemic.”
Cheung said CLSA remains cautious with the market out of concern credit issued by banks is not being allocated correctly — in other words, not reaching sectors, such as manufacturing, that need it the most.
“We are turning cautious on the market as stimulus effects fade,” the report said. “Weak [Purchasing Managers’ Index] is a warning signal. We had been positive on the market since January due to low valuation and government stimulus.”
China’s official April PMI came in at 50.1, lower than expected. The Caixin Manufacturing PMI fell to 49.4 in April, down from 49.7 in March. That index specifically measures the output of small and medium-size factories.