China's Banking Industry Hit by COVID-19... Increasing Non-Performing Loans but No Risk?

[Asia Economy Beijing=Special Correspondent Park Sun-mi] Due to the economic shock caused by the spread of the novel coronavirus infection (COVID-19), non-performing loans (NPLs) in China's banking sector are rapidly increasing. However, Chinese financial authorities have stated that the rise in bank non-performing loans is a controllable risk, suggesting that efforts to rescue small and medium-sized banks in crisis are likely to continue for the time being.

On the 22nd (local time), the China Banking and Insurance Regulatory Commission (CBIRC) announced that the NPL ratio in the banking sector reached 2.04% at the end of the first quarter, up 0.06 percentage points compared to December last year. Generally, NPLs refer to loans overdue for more than three months that are unlikely or difficult to recover.

Xiao Yuanqi, CBIRC's head of risk management, explained, "More than 450 billion yuan of non-performing loans occurred in the first quarter," adding, "This is an increase of 81 billion yuan compared to the same period last year."

The increase in non-performing loans in the banking sector is due to the rise in companies unable to repay debts as China's economy contracted amid the COVID-19 outbreak in the first quarter. China announced an unprecedented -6.8% economic growth rate for the first quarter of this year. Although Chinese banks, at the government's request, are preventing corporate defaults by granting repayment deferrals, it is insufficient. Some estimate that the actual level of non-performing loans in China's banking sector is much higher than what has been reported to financial authorities.

According to the CBIRC, banks took measures in the first quarter to minimize the economic impact of COVID-19 on companies by deferring loan repayments amounting to 880 billion yuan and refinancing debts worth 576.8 billion yuan. Earlier this month, Standard & Poor's (S&P) Global estimated that Chinese banks would face credit losses due to repayment deferrals totaling 1.6 trillion yuan caused by COVID-19. The banking sector's losses are expected to be reflected in the first-quarter earnings announcement scheduled for the 28th.

As the economic shock from COVID-19 continues, the CBIRC expects the upward trend in the banking sector's NPL ratio to persist into the second quarter. However, financial authorities explain that overall financial market risks are under control and that restructuring plans for some small and medium-sized banks are also being prepared.

Accordingly, the consolidation of insolvent small and medium-sized banks and government-funded bank rescue efforts are likely to continue for the time being. This is interpreted as a measure to prevent risks from spreading throughout the financial sector due to bank failures and to avoid losses for depositors and creditors.

Regarding the recent capital increase plan for Gansu Bank, which is facing a crisis due to insolvency, it is reported that Gansu State-owned Assets Investment Group, a state-owned enterprise fully funded by the Gansu provincial government, will participate. The market expects that Gansu Bank will secure about 6.2 billion yuan (approximately 1.7 trillion won) in capital through this capital increase, which could help extinguish the urgent management crisis. Liaoning Province's Jinzhou Bank, recently pushed to the brink of bankruptcy, has also received a bailout of 12.1 billion yuan from the Chinese government, increasing the likelihood of its revival.

This content was produced with the assistance of AI translation services.