Credit institutions in China borrow money at the highest interest rates of the last six years as investors expect the level of bad loans to grow aggressively.
Banks in China are funded at the highest level of interest from 2007 to the present on a pessimistic note amid expectations regarding the level of bad loans. The yield spread for the one-year AAA bank bonds over one-year sovereign notes increased by 56 basis points last week reaching a record high, 163 points. The AA gap was up 59 basis points to 188.
The largest credit rating agencies warn banks may soon run out of cash with an increased risk for their customers to default on their loans.
“There could be unintended consequences from the central bank’s approach. We expect some deleveraging at banks’ interbank and wealth management businesses to unfold. Credit growth would slow. This could pressure banks’ asset quality,” said Liao Qiang, a director at the Standard & Poor’s office in Beijing.
Both international rating agencies and official press organizations in China warn about the imminent growth of non-performing loans (NPL).
“The problem is that when debt levels have got so high, and it’s more debt that keeps the existing debt afloat, you absolutely have to stop the process, but it’s very difficult to do so in an orderly way. There’s always a risk that the unwinding of the debt becomes disorderly and the PBOC will be blamed for mismanaging the process,” said Michael Pettis, a finance professor at the Beijing University.
The problems come from the small and medium enterprises sector. Analysts at Citi Securities Co. show that 97% of over 42 million small and medium enterprises in China are no longer able to get new loans which will actually create serious problems and could bring them in a position to not being able to pay the loans already contracted. Small and medium enterprises (SME) have a crucial share of China’s economy. According to JP Morgan Chase, SMEs generate a turnover of 36 trillion yuan ($5.9 trillion), about 70% of the gross domestic product of the second largest economy of the world.
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