This Time, we will mainly talk to you about the increasingly serious bad debt problem of Chinese banks and a major measure recently introduced by the China Banking and Insurance Regulatory Commission to divest banks of their bad debts. Let’s analyze the pros and cons of this measure and the risks it may bring in the future.
China’s banking sector may be under greater pressure to expose non-performing assets in the future ……
One
After more than half a year of discussion, the policy of pilot expansion of non-performing loans of Chinese commercial banks to serve soft finally landed.
Recently, the China Banking and Insurance Regulatory Commission (CBIRC) issued the “Notice of the General Office of CBIRC on the Pilot Transfer of Non-Performing Loans” (hereinafter referred to as the “Notice”) to all large banks, joint-stock banks and other institutions to further expand the channels for the disposal of non-performing bank loans and ease the pressure on the disposal of non-performing bank loans.
The Notice formally approves the transfer of single-Family non-performing loans to public and bulk transfer of individual non-performing loans to achieve a true and complete transfer of assets and risks. It is generally believed that this Circular is to broaden banks’ NPL disposal channels, help banks to resolve potential risks, and prevent financial crisis triggered by deterioration of banking sector balance sheets due to the dragging down of banks’ bad loans.
In June 2020, the CBRC had issued a draft for comments in the industry. And the biggest difference between the Notice issued this time and the consultation draft is that the types of loans for bulk transfer of personal non-performing loans in the consultation draft include personal housing mortgage loans and auto consumer loans, while the scope of personal non-performing loans issued this time does not include the previous housing loans and auto loans, but mainly includes personal consumer credit loans, credit card overdrafts, personal business credit loans, etc. Why there is this difference, the following will give you a good chat.
I have always said that there is a deep purpose behind the introduction of any financial policy by the Chinese government. The layman generally only sees the hustle and bustle of the introduction of the policy, but can not see the doorway inside. Today, let’s talk about the main purpose of this policy.
First of all, under the impact of the epidemic, Chinese banks have more and more bad debts, which have reached the point that they must be dealt with and failure to do so may bring financial risks to the banks.
Data released by the China Banking and Insurance Regulatory Commission show that at the end of the third quarter of 2020, the balance of non-performing loans of commercial banks was 2.84 trillion yuan, an increase of 98.7 billion yuan from the end of the previous quarter; the non-performing loan ratio of commercial banks was 1.96%, an increase of 0.02 percentage points from the end of the previous quarter. Even looking at such embellished data released by China, you can see that non-performing loans are increasing at a relatively fast pace. Of course, this is the middle contains both public non-performing loans and personal non-performing loans of banks, the main reason is that because of the impact of the epidemic, many enterprises and factories closed down, people’s unemployment and pay cuts are more common, so, whether it is credit loans, consumer loans or business loans, many can not afford to repay. There were defaults or delays, and they slowly turned into non-performing loans. In the first half of last year, we have seen many such reports, such as credit card overdue, and mortgage overdue, which are basically personal non-performing loans.
Among the new non-performing loans that were affected by the epidemic last year, the increase in personal non-performing loans was of great concern. Taking credit card non-performing loans as an example, according to the Central Bank’s “general situation of the operation of the payment system in the third quarter of 2020”, as of the end of the third quarter, the total amount of bank card credit granted was 18.59 trillion yuan, the balance of bank card credit payable was 7.76 trillion yuan, and the total amount of credit card overdue six months outstanding was 90.663 billion yuan, an increase of 6.13% from the previous year.
The bulk transfer of personal non-performing loans has been a “no-go” area for banks to dispose of personal non-performing assets until now. Banks currently have a single means of disposing of personal non-performing assets, mainly including collection or write-off, but there is no bulk transfer option. Allowing bulk personal non-performing loans to be transferred on a pilot basis may be related to the increased potential pressure on personal non-performing since the epidemic last year, which is the primary reason for launching bulk transfers of personal non-performing loans at this time.
At the same time also because of the epidemic, many local government loans as well as loans from state-owned enterprises, there will also be repayment difficulties, default, then these loans to the public also face the risk of becoming non-performing loans. Such a risk, of course, banks are not willing to bear independently, so simply packaged and transferred out, is also a way to cut the risk.
Second, the non-performing loans in China’s banking industry is not transparent, many banks although the bad debt rate is very high, has affected the safety and operation of the bank. However, from the statements, none of them can be seen as a problem or are relatively healthy. Such a phenomenon has allowed the risks of China’s banking industry to be covered up. It is fine if there is no problem, but when there is a problem, it is a run, collapse and other big problems. Such financial risks are great.
The bad debt ratio of Chinese commercial banks is only about 1.9%, but several world authorities have assessed it to be about 7%, which is very high. If the bad debt ratio is not reduced, banks are extremely vulnerable to financial risks. It has been more than 20 years since Zhu Rongji divested several major commercial banks of their bad debts, and the bad debt rate of Chinese commercial banks has definitely reached a critical point, and it will be too late if they are not divested.
Two
So, these bad loans to the public, the divested credit, consumer and business loans, and finally into whose hands? This is the second issue we want to talk about.
The pilot, in addition to specifying the types of non-performing loans to be piloted, also specifies the scope of institutions participating in the pilot, as well as the specific scope and manner of participation of different types of institutions.
In the pilot institutions, clearly defined to participate in the pilot of non-performing loans, including industrial, agricultural, construction, transportation, postal storage and other six large state-owned banks and 12 national joint-stock banks. Participating in the pilot non-performing loan institutions include financial asset management companies (AMC), eligible local asset management companies and financial asset investment companies (AIC).
And in between, the bulk of the purchase of these non-performing loans is essentially borne by state-owned financial asset management companies. Here’s an interesting piece of news, as the Chinese government has set up an emergency financial company at a time when the CBRC has introduced measures to transfer individual non-performing loans in bulk.
On December 17, the fifth largest financial asset management company in China, China Galaxy Asset Management Co. Why is it the fifth largest financial asset management company? In 1998, before the accession to the WTO, Zhu Rongji established four such companies, mainly Huarong, Great Wall, Dongfang and Cinda (of which Huarong Chairman Lai Xiaomin had just been sentenced to death).0 That year, through the Ministry of Finance’s capital injection, the central bank’s purchase of debt and the company’s contribution, together to buy the bad loans of several major commercial banks. Let these banks lightly, to prevent the outbreak of a crisis in the Chinese banks after the entry into the market, affecting the entry process. But the result is that the taxpayers and the general public will bear the Inflation risk as the cost to pay for the state-owned commercial banks. Lai Xiaomin’s more than 100 mistresses and the room full of yuan-dollar Gold are the people’s money.
The fifth financial asset management company, Galaxy Assets, which was established after 21 years, is actually of the same nature as the previous four. Although the current registered capital is only 10 billion, but the later less the central bank and the Ministry of Finance to pay, and the amount is most likely trillions. Otherwise, China’s banking industry 2.8 trillion bad debts can not catch.
So, what do these financial asset companies do after acquiring these non-performing loans?
The first thing to do is to collect. These people can’t pay back the money because of credit loans, consumer loans or business loans, and the banks may not have enough manpower and resources to collect on this part of the people. And these loans may not be secured, so collection is difficult and the likelihood of recovery is even lower. In contrast, Home loans and car loans basically have physical assets in place and basically have a collateral relationship in them. So, this time, the reason for not putting home loans and car loans into the transfer of non-performing assets pilot may be here, because it is a little easier for banks to recover funds from home loans and car loans than from consumer loans, credit loans, business loans, etc.
So, the bank will sell this part of the non-performing loans at a discount to the financial asset management company, the asset management company will first go to collect, to put it bluntly, is to find people to go to the door to collect the debt, such a scenario I believe in TV shows and movies we have seen, as long as you are vicious enough, many debts can still be returned. These were initially acquired at a discount, and once the collection is successful, the profits in between are very high. The financial asset management company should have a coping mechanism, even if they do not personally, they can also entrust the business of debt to other professional teams. As for whether it is violent collection, it is not easy to say whether it is a black illegal act, the people who owe debts are not easy to live.
Of course, there is another possibility, is how violent collection, these bad loans still can not be collected. Then what to do? Packet transfer out, let the market investors to be the receiver. This is basically the set-up in the U.S. subprime mortgage crisis. Wall Street will be bad credit mortgage layers of packaging, packaged into financial products for sale in the market, purchased by many financial institutions. Once the value of the property falls and these people cut off their payments, these assets basically become worthless junk assets.
The difference is that China is divesting mainly consumer, credit and business loans from the banks this time, but these assets are also very risky in China at the moment. A large number of people who are unemployed or have declining incomes can’t pay off their credit cards, can’t pay off their consumer loans, and many are even just siphoning off credit cards to make ends meet. So this piece of non-performing loans is also hurting people if they are packaged out and sold. The victim is the market betting institutions and individuals, the future is also likely to detonate the financial risk. Of course if the market does not have enough purchasing power, the central bank may also consider stepping in. From the side it is also the people who are paying the bill.
At present, the mortgage although not join in, probably mainly because China’s property has not yet appeared a large fall in the situation, the current fall is mainly in the north, the south is still rising. But in the future, once the house starts to fall in the country in general, the property will face the problem of insufficient collateral value, and if the mortgage lender cannot add collateral, the mortgage payment may also be cut off soon. It is also very likely that mortgages will be included in the future as assignable non-performing loans.
In short, the asset package of these non-performing loans may also eventually flow into the market through various forms, making the people the receiver. Of course, although there are currently 2.8 trillion non-performing loans, containing mainly to the public and to individuals. But after excluding the non-performing loans of housing and car loans, the remaining non-performing personal loans may not account for a high proportion. But the next step will be to include non-performing loans for home and car loans, so there may be more non-performing assets.
As I said before, the $2.8 trillion in bad loans from commercial banks that China has announced so far is just the tip of the iceberg, and the real bad loans may be more than 10 times that figure. According to an analysis by Fitch International credit rating agency, by the end of last year, China’s financial system had 51 trillion yuan of bad loans, and China’s actual bad loans were $7 trillion higher than the official figure. The real bad debt rate of Chinese banks could be as high as 34%, which is straight up to the level of bad loans before the state-owned bank reform under Zhu Rongji at the end of last century.
At present, Chinese banks have little experience in asset valuation and asset pricing, and may be in the process of exploration. Once a model is worked out, the future of all non-performing assets packaging is bound to be the trend!
So, the current operation of packaging non-performing bank assets promoted by the CBRC is a replica of the 2008 subprime mortgage crisis in the United States, which can be said to be a preview of the subprime mortgage crisis 2.0. If the Chinese government doesn’t find a way to divest these bad loans, commercial banks will be brought down one by one by non-performing assets. And if these tens of trillions of dollars of bad loans are stripped out, whether they are purchased by market institutions and investors, or by the central bank printing money to buy them, it will be an even bigger financial disaster! Good and bad are dead, just the difference between beheading and lynching.
Everyone in the investment must shine a bright light, must understand what you spend money to buy the underlying underlying in the end, never buy these junk debt, or the risk will be great!
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