Understanding Non-Performing Loans in China

Only available on StudyMode
  • Topic: Inflation, Tier 1 capital, Debt
  • Pages : 23 (1960 words )
  • Download(s) : 78
  • Published : March 13, 2012
Open Document
Text Preview
Understanding Non-Performing Loans in China
Past, Present & Future

Agenda
Executive Summary Background of Non-Performing Loan Analysis with Macroeconomics Framework Major Findings Conclusion P.4 P.5 – P.11 P.12 – P.28 P.29 – P.39 P.40 – P.42

Executive Summary
•  Subject: Analysis of Chinese Non-Performing Loans, a growing major concern in China economy •  Case Background: The Big 4 State banks accumulated a huge amount of NPL. Starting from 1999, to perform a banking sector reformation, Chinese government approved the set-up of Asset Management Companies (AMC), which were used to absorb, securitize and transform the NPL from Big 4 •  Our Case Study: •  We start with an analysis of the fundamental causes of Chinese NPL, from a historical review, as well as applying macroeconomics theories we learned •  We analyse the effectiveness of the use of AMC, updated with the most recent NPL information •  Our findings show that although Chinese government raised awareness of NPL issue, there are other risks (like shadow banking) which are not revealed in NPL ratio •  Our Conclusion: A further banking sector reformation is crucial to China’s economy

What is Non -Performing Loan (NPL)?

IMF Definition:
•  Interest and principal payment > 90 days overdue
•  Including interest payment which is capitalized, refinanced or delayed by agreement

•  Good reasons to doubt that payments will be made in full, even payment < 90 days overdue

Background of Non Performing Loan – The Timeline
The Chinese banking sector was anchored by 4 large state banks, known as Big 4. They worked under the government directives, where their investments were concentrated in the state-owned projects having minimal repayment credentials.

1979

1997
Asian
 Financial
 Crisis
 hit
 the
 East
 Asian
 economy
 many
  East
 Asian
 countries
 were
 burdened
 with
 mass
  amount
 of
 NPLs.
  China
 had
 minimal
 impact,
 due
 to
 a
 closed
 financial
  system.
 

Background of Non Performing Loan – The Timeline
WTO:
 China
 must
 improve
 its
 NPL
  issue
 to
 join
 WTO
 

1979
1997

1999
4 Asset Management Companies (AMCs) established to absorb NPL from Big 4

Background of Non Performing Loan – The Timeline
•  China entered into WTO agreement, that makes the NPL problem heightens •  The Chinese banks were ill-equipped with credit risk management strategies •  Large share of low-rated bonds in their Balance Sheet has set themselves in high risk exposure

1979

1997

1999

2001

Background of Non Performing Loan
•  The arbitrary interest rate set by PBC for both loans and deposits of the Chinese banks make them unable to charge a lending rate above the interest rate cap on loans to high-risks clients nor reward the low-risk clients with a lending rate below the interest floor •  Organizations with low credit worthiness and low repayment ability can obtaining the fund easily, that make the high NPL problem persist

1979

1997

1999

2001

Background of Non Performing Loan – The Timeline
NPL worth RMB1.9 trillion still lying with the SOCBs. The Chinese government established a wholly-owned government investment company to inject foreign exchange from the State Administration of Foreign Exchange to the large state-owned banks

1979

1997

1999
2001

2003

Background of Non Performing Loan – The Timeline
China banking system reform: a 5-tier loan classification system •  Assess loan risk according to the borrower’s repayment ability •  CBRC responsible for checking the implementation OK
OK
NPL
NPL
NPL

•  Performing 正常
•  Watch-list 關註
•  Substandard 次級
•  Doubtful 可疑
•  Loss 損失

1979
1997

1999
2001
2003

2004

What next?

Analysis under Macroeconomics Framework

Part 1: Analysis of the Cause of NPL Using Macroeconomics Theory •  Historical...
tracking img