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Chinese banks struggle to cope with coronavirus fallout

By Philip Smith

Economic growth could fall to 4.4 per cent, dangerously close to the point at which many Chinese banks would fail to meet their capital adequacy ratio

China’s banks could see a surge in non-performing loans of up to ¥7.7tr (£85bn, €1tr, $1.10tr) this year unless the coronavirus outbreak isn’t quickly contained.

“As the outbreak disrupts Chinese production, some companies and individuals will have difficulty with debt repayments,” warns credit agency S&P Global.

Non-performing loans are those in, or close to, default. To counter the potential instability, major Chinese lenders quickly responded by reducing the one-year loan prime rate – a key lending rate used across China’s financial system – by 0.1 percentage points to 4.05 per cent.

That move follows the central bank’s decision earlier this week to cut medium-term lending rates to stimulate China’s economy.

In an attempt to control the virus, travel has been curtailed with many factories and shops forced to shut. This is having a major impact not only on the Chinese and Far Eastern economies, but it is also being felt worldwide. So far 75,000 have been infected and there have been more than 2,000 deaths.

S&P has forecast that China’s annual economic growth could drop to 4.4 per cent if the outbreak does not peak until April. A recent stress test by China’s central bank showed 17 of 30 local banks would fail to meet their capital adequacy ratio if growth slowed to 4.15 per cent.

The People's Bank of China has said it will be more tolerant of bad loans that had been affected by the outbreak. “We are prepared to allow non-performing loans to increase. We believe that with our efforts, the problem of non-performing loans will be properly resolved,” said deputy governor Fan Yifei. “Overall, the ratio of non-performing loans is relatively low.”

FURTHER READING: Banks in China analysis: are smaller lenders about to collapse?

FURTHER READING: PBOC 1.2tr yuan injection fails to stop losses

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