China recently saw its first case of corporate default on debt. And earlier this week, concerns over more breaks in the capital chain triggered a three-day bank run in a small city in East China’s Jiangsu Province. Analysts say more defaults are expected as the government presses ahead with interest rate liberalization and industrial restructuring.
Many corporate bonds come due this year and that increases the potential for a rash of debt defaults. Will Chinese banks be able to ride the storm out? The Industrial and Commercial Bank of China said at its 2013 annual results meeting that it has stringent control over debt products.
Yi Huiman, President of ICBC, says, "We have forged a good partnership with trust firms. We scrutinize any possible hidden risk. By the end of 2013, our agency business is not that big. The total amount is 11.7 billion yuan, 24 projects. Trust firms do their due diligence, but after our investigation of them, we think total risk is under control."
But debt is not all that upsets the stability of China's financial industry. Banks face loan repayment threats too. Northwest China's biggest private firm Haixin Steel, recently failed to pay back 3 billion yuan on time. That may be just the beginning of larger financial troubles because nearly 15 billion yuan in loans to Haixin are reportedly exposed to similar risks. ICBC last year clamped down on loans to industries with severe overcapacity by nearly 20 billion yuan. That brought the bank's bad loan ratio in those industries to 0.79% from 0.97% in 2012. ICBC's loans to local government financing vehicles also dropped by 94.3 billion yuan last year.
Despite reassurances from major Chinese banks, analysts say default woes and capital constraints will hit smaller banks hard. And it is a part of a painful process that's inevitable, as China introduces its tough economic reforms.
Tom Liu, CEO of Chinascope Financial Co., says, "In this super competitive environment, city commercial banks are feeling the pinch. When interest rates liberalize, the interest spread will come down, and that will eat into their capital. But because of their limited ability to access the equity market, a lot of them are not even listed. So they will take on risky assets, and that would mean higher NPL ratios."
However, Liu said the falls and rises of those businesses will help return innovation to the market. He adds, "That will have a profound effect on banks, because it will force not only the banks but the regulatory regime to allow banks to innovate."
Chinese Premier Li Keqiang previously said that a number of defaults are expected during the economic reform. This indicates debt defaults would not be a surprise to most market participants as China moves closer to a more efficient, and fairer economic playground.
Source: CCTV
