, a mid-tier lender from a southern Chinese river town, imparted some bad news on March 19th. In a rare disclosure, it told investors profits for 2023 might fall by 30%, because of poorly performing loans. This is just the sort of information Chinese banks are normally reluctant to reveal. Indeed, they often go to great lengths to avoid doing so.) that in return purchases its toxic loans.
To regulators it may seem as if banks involved in such transactions are solving their bad-debt problems; in reality, they are concealing them. As Ben Charoenwong and Ruan Tianyue of the National University of Singapore Business School, and Meng Miao of Renmin University, have noted, over time these troubled loans accumulate. For hundreds of banks across the country, they represent a ticking bomb.
The authorities are now catching on. They have hit financial institutions with a flurry of penalties for improper handling of debts. The National Administration of Financial Regulation , a new banking regulator, has handed out more than 20 punishments. In December Citic Bank, a commercial lender, was fined 220m yuan for mismanaging bad debt, a record amount. Agricultural Bank of China, a large state lender, received a 27m yuan fine for similar transgressions.
Increased surveillance can in part be attributed to the new watchdog’s increased vigilance. Established last year, thehas stronger enforcement capabilities than its predecessors. Supervision of banks had been divided among several agencies, allowing corruption and producing lapses in oversight, which contributed to the collapse of several banks, starting in 2019. TheBut some of the progress began earlier.
How much of this surge in activity can be trusted? Recognising and digesting bad debts is difficult. Discovering such lending weakens financial institutions’ balance-sheets since they are forced to use capital to provision for future bad debts, which in turn makes it harder for the government to direct financial support to favoured industries in pursuit of other policy goals.