China recorded just 0.4 percent year-on-year increase in its GDP, as per its recent quarterly data. The banks as a result have started the largest credit raising exercise seen in years to prepare for a flurry of bad loans that are expected to hit the banking sector due to the economic slowdown.

The ongoing Covid-19 restrictions under the country’s zero-Covid policy and economic slowdown are worsening the credit situation in the country.

Banks, especially China’s four major state-owned lenders, have sold a consolidated 568 billion yuan ( USD 84 billion) in Tier 1 and Tier 2 corporate bonds until July 27, according to data compiled by Bloomberg. This figure is 29 percent higher than the same period last year, reported Bloomberg.

Also read:

China fines Didi Global $1.2 billion, fuelling hopes of thaw in regulatory crackdown

While Industrial and Commercial Bank of China (ICBC), Construction Bank of China (CBC), Agricultural Bank of China (ABC) and Bank of China (BOC), the four major Chinese banks, were adequately capitalised even by international standards, the smaller entities in the banking sector suffered a setback.

The small and medium banks, which manage 77 trillion yuan (USD 11.5 trillion) in assets out of the 336 trillion yuan (USD 50 trillion) controlled by the overall banking sector, are thinly capitalised. This results in a high non-performing assets ratio and high credit risk.

The recent case of Baoshang Bank, which was declared bankrupt in a final cleanup two years ago, is a prime example of this.

The new deleveraging exercise undertaken under President Xi Jinping's auspices has also impacted the property sector in a country where 70 percent of household wealth is associated with real estate prices.

Also read: China's growth may slow to 4% this year, but its supply chains are intact: Experts

The resulting defaults of real estate players like Evergrande and others have resulted in many homebuyers refusing to pay mortgages on houses that are still under construction. The housing construction work has long been suspended amid the Covid-19 restrictions.

Homebuyers of over 100 projects across 50 Chinese cities have refused to pay the mortgage for incomplete housing projects, a move that threatens further defaults on loan repayments.

Experts estimate that the fallout from bond defaults, which has already surpassed USD 20 billion this year compared to USD 9 billion in defaults in 2021, will not result in a global economic crisis like that seen in 2008-2009 in the aftermath of the housing market collapse in United States.

The government is trying to raise more capital to adequately support its smaller banks as the mortgage boycott spreads to more provinces. But, at the same time, the bad loans to foreign projects under the Belt and Road initiative also continue to rise vitiating the credit crisis in the country.

Also read: Explained: Property giant Evergrande’s debt crisis; what it means for China and beyond

First Published:Jul 28, 2022 9:28 PM IST