Ilya Garger, Marketwatch Last Update: 7:30 AM ET May
HONG KONG (Marketwatch) -- China's
financial system could face $220 billion in losses due to bad loans,
according to a report released Tuesday by Fitch Ratings.
said the losses could swamp the reserves of major banks, and in some
cases completely wipe out their capital. "This figure is
close to one-third larger than the stock of capital in the entire
banking system, underscoring the extent of asset quality weakness that
still remains," said Charlene Chu, the report's author. The report also
puts the country's total amount of troubled debt at roughly $700
billion -- more than quadruple the $164 billion figure frequently cited
While the government's number
refers to officially classified bad loans at commercial banks, Fitch's
number covers a broader range of debt, including "special mention"
loans that are not yet nonperforming but may become so. On
top of the official $164 billion, Fitch cites $40 billion in bad loans
at rural cooperatives as well as $270 billion of "problem loans" in the
banking system which are not officially classified as "nonperforming."
total also includes $197 billion in nonperforming loans that have been
transferred to the balance sheets of asset-management companies, which
the ratings agency said "no longer represent direct losses for banks
but are a future liability for the government."
on bad-loan recovery ratios it calls "relatively conservative," the
report concludes that total losses from bad loans could be upwards of
$260 billion. Since Chinese banks' loan loss reserves are estimated at
$40 billion, that leaves $220 billion in "total estimated unfunded
The report adds that "curtailing the
creation of new NPLs remains an ongoing challenge ... given banks'
still underdeveloped risk management practices and internal controls."
Chinese government has been sensitive to high estimates of the
country's bad-loan problem. On May 15, New York-based accounting firm
Ernst & Young retracted a report that put China's potential
bad-loan liabilities at $911 million. The retraction came
days after China's central bank issued a statement calling the Ernst
& Young figures "distorted" and "ridiculous."
& Young denied its retraction was due to official pressure. Ilya
Garger is a reporter for Marketwach based in Hong Kong.