One Step Closer to People's Bank of China Intervention?

03/31/2014 5:45 pm EST

Focus: FINANCIALS

Jim Jubak

Founder and Editor, JubakPicks.com

The considerable increase of China's big bank write offs of bad loans last year has raised suspicions, and MoneyShow's Jim Jubak considers what this means for the entire Chinese financial sector, both in the short- and the long-term.

Yipes. China's five biggest banks increased their write off of bad loans by 127% in 2013 over 2012 levels. The write offs still came to just $9.5 billion in 2013, the just released 2013 financial statements from the bank show. (China's big five banks account for 50% of all bank loans in China.) And the banks remain profitable, even if, at 7% to 15% growth, profits grew more slowly in 2013 than in 2012.

But the rising level of write offs, along with the puzzlingly low ratio of non-performing loans at these banks, has raised suspicions that banks are manipulating write offs to prevent the non-performing loan ratios from rising so quickly that they set off alarms in financial markets. The ratio of non-performing loans—loans that are in trouble, but that aren't yet in so much trouble that they need to be written off—rose to 1% at the end of 2013 from 0.95% a year earlier. (Since China's big banks have aside such large reserves against loan losses, write offs don't hit profitability particularly hard.)

Some analysts believe that non-performing loan ratios at China's big banks are, in reality, as much as five times above the official figures.

I have less worry about China's big banks and the likelihood they are manipulating their loan loss numbers than I do about problems elsewhere in the Chinese financial system. The country's big banks are, after all, the most heavily reserved part of the system and have the easiest access to government funds if they need them.

The real crunch, I fear, is at small to medium-size banks, which, not only have less in reserves and less clout in Beijing, but have a loan book with more exposure to the wobblier companies in China's economies.

Strangely enough, at least some players in China's financial sector seem to regard the bad news on write offs as good news for asset prices. The theory continues to be that the central government can tolerate only so much bad news before it decides to add stimulus to the economy and cash to the banking system. From that relatively short-term perspective, the news on bad loans moves the day closer to when the People's Bank will intervene.

Such intervention would create a short-term (and probably explosive) rally in China's stock market.

How long it might last would, of course, be a good question—even if it's not one being asked at the moment.

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