The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
China’s bad debts could blow a $500 billion hole in bank balance sheets. That’s roughly how much extra equity the eleven biggest lenders might need if 10 percent of their loans went sour, according to a Breakingviews calculator. Though the chairman of ICBC, China’s biggest lender, thinks dismal bank valuations are “unfair”, the malaise is well deserved.
On the face of it, the industry is in great shape. Non-performing loans were below one percent of total loans at the end of June. But that number is meaningless. Many bad loans are simply rolled over while overdue loans, a herald of problems to come, are multiplying at some banks. Of particular concern is the $1.5 trillion of credit channelled to local governments through financing vehicles.