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China’s Drastic Remedy For Bad Corporate Debt

Nonperforming loans (NPL) are spiking in China, according to reports, and banks are looking for ways to ease their losses. An exclusive report from Reuters on Thursday (March 10) said China’s central bank is readying new rules to help the banks.

According to unnamed sources, officials are preparing regulations that would allow lenders to swap their outstanding nonperforming loans for stakes in the companies in which they invested.

The move is part of broader efforts to reinvigorate a powerhouse economy that has been slowing down in recent months and causing a ripple effect across the globe.

Reports said China’s NPL levels hit a 10-year high in 2015 amid slowing of economic growth. Banks were burdened by more than $614 billion in these NPLs, reports added.

Sources said the People’s Bank of China is working up a remedy.

“Such a rule change shows banks’ bad loans have risen to such a level that this issue has to be tackled now before it’s too late,” said Shanshan Finance Head of Equity Trading Wu Kan to the newswire.

Many of these loans were given to state-run companies in the steel and coal sectors. According to reports, the central bank’s plan would allow these banks to buy some time, while other regulations tackle problems on the side of these suppliers and manufacturers.

According to reports, “the quality of assets held by banks is worse than it looks.” Analysts have said that banks are underreporting the level and degree of their bad loans to safeguard balance sheets for investors.

Any regulations proposed by the central bank would need approval from the State Council; this, reports said, would mean the rules could come into effect without having to amend current commercial bank laws.

The sources did not give details on what the banks would do with the shares in the companies to which they lent.

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