World Economy

China Banks Feel Strain of Bad Debt

China Banks Feel Strain of Bad Debt China Banks Feel Strain of Bad Debt

For Chinese banks, the decision to lend to companies such as Bohai Steel Group Co. Ltd. was for years a no-brainer. Lenders took heart from its state backing, which appeared as solid as the millions of tons of steel pipes that rolled off its production lines each year.

That ironclad image is now tarnished. Plunging demand and a worsening glut in production capacity have left Bohai Steel struggling to repay as much as $30 billion in debt. Worried creditors—more than 100 of them—are locked in negotiations with the company and local officials, NewsNow reported.

China’s bad loans are on the rise, as companies that borrowed heavily in headier times struggle against a slowing Chinese economy. Underscoring the slowdown, China said Friday that growth in the first three months of this year fell to 6.7%, a seven-year low. Growth might have been even slower had China not revved up lending during the quarter—a solution that could add to debt problems later on.

The stakes are high for banks and for the government, which ultimately controls a large portion of the economy.

China’s total local currency loans have more than tripled since the start of 2009, to about $15 trillion at the end of March, according to official Chinese figures from CEIC, China’s premium database. That is equal to 144% of China’s gross domestic product in the 12 months to the end of March—relatively high for China’s level of development, and still rising.

In January, Goldman Sachs said other countries that experienced similar debt run-ups faced either financial crises or prolonged slowdowns.

Defaults tend not to pose a risk to individual Chinese banks because the government is perceived as standing behind them. But a chain of defaults could lead to a pullback in lending that could crimp China’s economic output, said Anne Stevenson-Yang, a co-founder of J Capital Research.

Profit growth at China’s biggest state-owned banks stalled in the first three months of the years as bad loans mounted. Bad loans as a share of their total portfolio remains low, at less than 2.5%, but economists believe the figure understates the problem because banks often extend the payment dates for problematic debt.

Over the years, Bohai Steel stressed its ties to lenders including the Bank of China, Industrial Bank and Citic Bank, among others, according to statements on its website. In 2013, the company said, it received a roughly $4.6 billion line of credit from Bank of China. A recent article in Caixin, a respected Chinese financial news outlet, said Bohai Steel’s 105 creditors included at least three local banks in Tianjin and Beijing that were each owed more than $1.5 billion.