China’s bad debt problem: Underestimated NPLs still a big threat to China’s banking system

CHINA ADVISORY - Report 16 Feb 2018 by Andrew Collier

There have been a number of external estimates of China’s bad loans. The most widely utilized number was provided by the IMF, which analyzed 2,871 companies to estimate what percentage was not generating enough cash to pay interest expense. It arrived at an estimate of 15.5% of total corporate loans on bank balance sheets at risk due to inadequate EBITDA/interest expense.

Our methodology relies on local interviews coupled with an analysis of categories that appear to be used by banks to hide NPLs. This methodology arrives at a figure similar to that of the IMF of 15.8% of corporate loans at risk. This report is a summary of our findings followed by a discussion of the banks’ “hide the bad loan” tricks. We also examine the public fraud case at one bank: Shanghai Pudong Development Bank. We emphasize that the estimates are only that – estimates – based on interviews.

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