China bad loans surge by most since 2005

Shanghai

CHINA'S bad loans jumped by the most since 2005 in the third quarter, fuelling concern that a cooling economy will be further weakened as banks limit lending to avoid credit risks.

Non-performing loans rose 72.5 billion yuan (S$15.4 billion) from the previous quarter to 766.9 billion yuan, the China Banking Regulatory Commission said on Nov 15. Soured credit accounted for 1.16 per cent of lending, up from 1.08 per cent three months earlier.

China is heading for the weakest economic expansion since 1990, and Communist Party leaders have discussed lowering the nation's growth target for 2015, according to a person with knowledge of their talks.

Bankers' low appetite for risk and their rising concerns about asset quality are leading to a "sluggish" expansion in credit, according to UBS AG.

Bad loans are "likely to rise for the next few quarters as a result of the slowdown in the Chinese economy", Tommy Xie, a Singapore-based economist at Oversea-Chinese Banking Corp, said before the statement.

Lenders' bad-loan coverage ratio, a measure of reserves for soured credit, fell to 247.2 per cent as of Sept 30 from 262.9 per cent in June. Their capital adequacy ratio, a measure of financial strength, increased to 12.93 per cent from 12.4 per cent three months earlier.

Aggregate financing, the nation's broadest measure of credit, missed analysts' estimates in October and growth in factory output cooled.

While new lending was "solid", banks are cautious and demand for credit is "frail" because of a property downturn, UBS economists including Donna Kwok and Wang Tao said in a note dated Nov 14. They see economic weakness triggering cuts in benchmark interest rates from early next year.

Party leaders have discussed lowering the 2015 growth target from this year's 7.5 per cent goal, the person with knowledge of their talks said last week. Gross domestic product will rise 7.4 per cent this year, according to analysts' median estimate in a Bloomberg News survey.

Weakness in the economy and extra competition for lenders because of financial deregulation may weigh on banks' profitability. Industrial & Commercial Bank of China Ltd, the world's largest lender by assets, last month reported its biggest quarterly jump in bad loans since at least 2006.

Stresses in the economy are visible through companies such as Sinosteel Corp, a state-owned miner and steel trader that in September reported financial difficulties. BLOOMBERG