The headquarters of Bank of China Harbin branch

Two senior Bank of China officials are missing and believed to have fled China after up to one billion yuan (120 million US dollars) was embezzled from a branch of the bank.

China’s banks are facing an ever tighter squeeze as profits stagnate and bad loans jump while the economy continues to slow and heavily indebted companies struggle to survive.

The country’s big four state-controlled banks — Agricultural Bank of China, ICBC, Bank of China and China Construction Bank — reported only marginal gains in net profit for the first half of the year, while official measures of non-performing loans surged.

While the central bank eased policy last week, cutting the benchmark interest rate and lowering the reserve ratio requirement for banks, analysts expect China’s lenders to remain under increasing pressure as they grapple with the most difficult market conditions they have faced in recent years.

“It’s definitely going to get tougher before we see any turnround,” said Patricia Cheng, head of China financial research at CLSA in Hong Kong. “This is the usual trick of kicking the can down the road, adding new liquidity and hoping it goes to more productive businesses so companies can generate better returns and pay off debt,” she said. “But for the last few years, it hasn’t come true.”

Analysts at Moody’s, the credit rating agency, estimate that the move to cut the RRR — the amount of reserves that banks must keep with the central bank — by 50 basis points to 18 per cent will free up Rmb600bn-Rmb700bn ($94bn-$110bn) of liquidity in the banking system.

Andrew Collier, managing director of Orient Capital, an independent research house in Hong Kong, reckons the People’s Bank of China will continue to reduce the RRR in an attempt to support the banks and the real economy.

But he doubts that will be effective in tackling the main challenge of rising bad debts.

“There are trillions available in banks that the government is slowly releasing like air being let out of a basketball,” he said. “It will help banks’ profitability but it won’t help them overcome the real problem.”

The Moody’s analysts argue that the PBoC’s August 11 decision to engineer a sharp fall in the renminbi, as part of a move to a more flexible exchange rate regime, has increased the risks of capital outflows, making funding and liquidity conditions for Chinese banks even tougher.

After years of stellar profits racked up as economic growth surged, the first half of this year was difficult.

ICBC, the world’s biggest banks by assets, warned that the “risks of illegal fundraising and financial frauds are spreading to the banking system” as it reported a 28 per cent increase in non-performing loans compared to the previous six months.

The bank’s NPL ratio rose to 1.4 per cent as of end-June, from 1.29 per cent at the end of March, while Bank of China’s rose to 1.4 per cent from 1.33 per cent and Agricultural Bank of China’s hit 1.83 per cent from 1.65 per cent. The ratio for CCB rose to 1.42 per cent from 1.19 per cent at the end of last year.

Net profit in the first half rose 1 per cent year on year at Bank of China, and by less than that for ICBC, AgBank, and CCB.

Ms Cheng said the growing bad debts at ICBC were a particular concern given that it has more large corporate clients, including state-owned enterprises. This might be a sign that more SOE defaults are on the way and “that’s my biggest fear,” she added.

Moreover, analysts believe that the bad debt figures may not accurately reflect the true extent of delinquencies.

“There are a lot of games being played by the banks, including the rolling over of loans to state firms in particular, so reported NPLs will be a lot lower than actual NPLs,” said Mr Collier of Orient Capital.

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